Foreign Tax Credit
Foreign Tax Credits are non-refundable credits for income taxes paid to a foreign government. The FTC is a tax break to reduce your US tax liability when living and working abroad or receiving investment income from a foreign source.
Can I claim Foreign Tax Credit?
The credit is available to you if you work internationally or receive investment income from a foreign source. If you are a taxpayer within the US who also pays or accrues taxes in a foreign country, you may also be eligible to a credit or deduction for such taxes.
How do I claim a Foreign Tax Credit?
If you are claiming as an individual, estate, or trust, file Form 1116, Foreign Tax Credit with your tax return.
If you are filing on behalf of a corporation, file Form 1118, Foreign Tax Credit – Corporations.
How do you qualify for Foreign Tax Credit?
The FTC is not only available for US expats living and working abroad, the main criteria is that you have simply paid foreign taxes.
To claim, the following conditions must be met:
- The tax was imposed on you by a foreign country or US possession.
- You accrued or paid the tax
- The tax is an income tax, tax on war profits, or tax on excess profits – however, foreign taxes on interest and dividends also generally qualify for the credit.
I want to know more about Foreign Tax Credit
How does a Foreign tax Credit work?
A tax credit lowers the amount of tax you owe by reducing your liability. You may qualify for a refund, but not all tax credits are refundable. In comparison, a tax deduction reduces the amount of income you have that is subject to US income tax.
For example, if you qualify for a $1,000 tax credit and you owe $2,000 in taxes, through the Foreign Tax Credit, your tax liability will be reduced to $1,000.
Where do I enter foreign tax paid?
When you wish to take a deduction from your taxable income instead of a tax credit, for each fund that paid foreign taxes, report this amount from Box 6 of Form 1099-DIV on Form 1040.
How much Foreign Tax Credit can I claim? What is the Foreign Tax Credit limit?
Foreign Tax Credit is a dollar-for-dollar reduction but the amount you claim cannot be more than your total US tax liability multiplied by a certain fraction. The numerator of this given fraction is your taxable income from foreign sources (outside of the US), and the denominator is your total taxable income from combined US and foreign sources.
However, you could be exempt from the Foreign Tax Credit limit if you meet the following conditions:
- Your qualified foreign taxes for the tax year do not exceed $300 if filing individually or $600 if filing a joint return.
- For the tax year, you only foreign source gross income is passive.
- All of your gross foreign income and foreign taxes are reported on a payee statement, such as Form 1099-DIV or 1099-INT.
- You elect this procedure for the tax year. When making this election, you cannot carry over any unused foreign tax to the next tax year.