Can I deduct the Foreign Tax Credit on my tax return?

You can claim an itemized tax deduction for foreign taxes paid on your tax return, or you can Claim the foreign tax credit on your tax return, which is intended to reduce the double tax burden that would otherwise arise when foreign source taxable income is taxed by both the United States and the foreign country from which the taxable income is derived.

Generally, only income tax paid or accrued to a foreign country or a U.S. possession qualify for the foreign tax credit on your tax return. Under certain conditions, however, tax paid or accrued to a foreign country or U.S. possession in lieu of an income tax will qualify for the foreign tax credit on your tax return. You may not claim a foreign tax credit or tax deduction on your tax return for tax paid on taxable income not subject to U.S.tax.

Who can claim the foreign tax credit on their tax return?

The foreign tax credit may not be claimed on your tax return if:

·         You are a nonresident alien (under most circumstances);

·         You are a citizen of a U.S. Possession (except Puerto Rico) but not a U.S. citizen or resident.

To choose to take the itemized tax deduction on your tax return, you must itemize tax deductions on Form 1040, Schedule A. To choose the foreign tax credit on your tax return you generally must complete Form 1116 and attach it to your Form 1040.

Your foreign tax credit on your tax return will be the smaller of the amount of foreign tax paid or foreign tax accrued, or the amount of U.S. tax attributable to your foreign income. This limit is computed separately on your tax return for each type of foreign income.

For tax years beginning in 1998, you will not be subjected to this limit (and therefore will not need to file Form 1116 to claim the foreign tax credit on your tax return) if all of the following requirements are met:

·         You are an individual.

·         Your only gross taxable income from foreign sources for the tax year is passive income that is reported to you on a payee statement (such as an Form 1099-DIV or Form 1099-INT).

·         Your qualified foreign tax for the tax year is not more than $300 ($600 if you are filing a joint tax return) and are reported on a payee statement.

·         You elect this procedure for the tax year.

If you make this tax election, you cannot carry back or carry forward any unused foreign tax to or from this tax year on another IRS tax return.

If you do not make this tax election and, because of the foreign tax credit limit determined on your Form 1116, you cannot use the full amount of qualified foreign tax paid or foreign tax accrued you are allowed a 2-year carry back and then a 5-year carry forward of the unused foreign tax.

You cannot take either the foreign tax credit or the tax deduction for tax paid or accrued on income you exclude under the foreign earned income exclusion or the foreign housing exclusion on your tax return. There is no double taxation in this situation because the income is not subject to U.S. income tax.

 

 

 

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