What Is the Foreign Tax Credit?

The Foreign Tax Credit lessens the burden of double taxation.

U.S. citizens living abroad are often taxed by the foreign country in which they live, as well as the U.S. This double taxation can result in a hardship for the taxpayer. The IRS implemented the Foreign Tax Credit as a way to ease this tax burden.

Filing

In order to claim the credit, taxpayers must complete IRS Form 1116 and attach it to their income tax returns. Corporations should file IRS Form 1118 instead of Form 1116.

Eligibility

The credit is available for all U.S. citizens, resident aliens and non-resident aliens whose foreign income is subject to both foreign and U.S. tax. In most cases, you can not claim the credit unless you paid tax to a foreign country.

Exclusions

You cannot take the foreign tax credit on taxes for which you only qualify to take an itemized deduction, taxes on international boycott operations, taxes on foreign mineral income or tax on any excluded income.

Limit

The total amount of your foreign tax credit cannot be more than your U.S. tax liability.

References

• Internal Revenue Service: Foreign Tax Credit
• Internal Revenue Service: Publication 514-Foreign Tax Credit for Individuals