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
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
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
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
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.