Foreign Tax Credit for U.S. Citizens and Residents

If you are a U.S. citizen or resident but you paid taxes to a foreign country, you may also be subject to international tax by the U.S. on that same income. However, in some cases, you may be able to take a foreign tax credit or itemized deduction on your U.S. tax return for those taxes already paid to the foreign country. The IRS allows you to take this foreign tax credit to prevent you from being double taxed on your foreign source income. As an international tax attorney with over 30 years of experience, I am writing this article to help taxpayers like you recognize when and how the foreign tax credit is applied.

What Foreign Taxes Qualify for the Foreign Tax Credit?

In order to qualify for the foreign tax credit, you must pay qualified income tax to a foreign country. For these purposes, qualified foreign income has a specific definition. The tax must actually be imposed upon you, it must be income tax in the foreign country, and it must be the legal and actual foreign tax liability. Finally, the tax must be imposed upon you and actually paid by you in order to qualify. Internal Revenue Service, What Foreign Taxes Qualify for the Foreign Tax Credit?, http://www.irs.gov/Individuals/International-Taxpayers/What-Foreign-Taxes-Qualify-For-The-Foreign-Tax-Credit%3F.

What are the Options I have for the Foreign Tax Credit?

If you take the foreign tax credit, you can take it as a deduction or as a credit. If you take the foreign tax credit as a deduction, then the foreign taxes that you already paid will act to reduce your overall taxable income for U.S. taxation purposes. If you choose to take the foreign tax credit as a credit, then the foreign taxes will act to reduce your overall tax liability. The option that you choose will apply to all your qualified foreign taxes. In other words, if you choose to take the credit for certain foreign taxes, then you cannot take the deduction for other foreign taxes, and vice versa. Internal Revenue Service, Foreign Tax Credit – Choosing to Take Credit or Deduction, http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Tax-Credit---Choosing-To-Take-Credit-or-Deduction. In many cases, it may actually be more beneficial to you to take the credit as a credit rather than a deduction. Internal Revenue Service, Foreign Tax Credit, http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Tax-Credit.

Does the Foreign Tax Credit Have an Impact on the Foreign Earned Income Exclusion?

It is important to note the impact of the foreign tax credit on your ability to claim the foreign earned income exclusion or foreign housing costs exclusion. The two concepts are closely linked, and if you choose to take the foreign earned income exclusion or foreign housing costs exclusion, then you will be unable to claim the foreign tax credit. Conversely, if you choose to take the foreign tax credit, then you may lose the opportunity to claim the foreign earned income exclusion or foreign housing costs exclusion. Internal Revenue Service, Foreign Tax Credit, http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Tax-Credit.

Forms Needed to Take the Foreign Tax Credit

If you wish to take the foreign tax credit for a tax year, you must complete a Form 1116 and attach it to your U.S. tax return. Internal Revenue Service Form 1116, http://www.irs.gov/pub/irs-pdf/f1116.pdf. The IRS also may allow you to take the credit without using the official form. If you are taking the foreign tax credit as a deduction instead of as a credit, then you should indicate that choice on your Schedule A attached to your Form 1040 tax return. Internal Revenue Service Schedule A (Form 1040), http://www.irs.gov/pub/irs-pdf/f1040sa.pdf.

A Tax Attorney Can Help You with the Foreign Tax Credit

If you are a U.S. Citizen or resident and you pay taxes to a foreign country, you may be qualified to take the foreign tax credit on your U.S. tax return. In this situation, you may need the assistance of a knowledgeable tax attorney to help you evaluate all aspects of your situation.

The Tax Lawyer - William D. Hartsock has been successfully helping clients comply with U.S. International Tax Laws and deal with issues related to worldwide taxation since the early 1980s. Mr. Hartsock offers free consultations with the full benefit and protections of attorney client privilege to help people clearly understand their situation and options based on the circumstances of their case. To schedule your free consultation simply fill out the contact form found on this page, or call (858) 481-4844.