![]() The first and most significant impact of the high-tax kickout rule is to prevent cross-crediting within the passive income basket. ![]() ![]() Under the high-tax kickout rule, the high-taxed income is removed from the passive basket and reallocated to the general income category. The high-tax kickout rule applies when the effective tax rate for foreign source income allocated to the passive basket exceeds the greatest U.S. ![]() They are: 1) passive income 2) general income 3) foreign branch income and 4) GILTI income. There are currently five baskets for calculating foreign tax credits. By way of background, Internal Revenue Code Section 904 requires that foreign tax credits be calculated separately for each type of foreign-source income included in a particular category or basket. If you are involved in the preparation of international information returns, you may have noticed on Forms 11 line items for “high-tax kickout.” The instructions promulgated by the Internal Revenue Service (“IRS”) for Forms 11 do a poor job defining the term “high-tax kickout.” This article attempts to clarify the meaning of “high-tax kickout” and its impact on claiming foreign tax credits. ![]()
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