How to Claim Foreign Tax Credit
When you own foreign stocks or bonds or invest in mutual funds that hold stocks or bonds in foreign companies, there may be foreign tax withholding on any dividend or interest distributions to you. These tax withholdings will be shown on distribution statements and year end statements issued to you. These withheld amounts can be taken as a credit against your income taxes or as an itemized deduction. Read on to learn how to claim foreign tax credit.
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Instructions
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Add together all of the foreign taxes withheld or paid from the mutual fund statements or the foreign entity reports for the year.
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Determine if all of the foreign income distributions from which taxes were withheld can be included in U.S. taxable income. If any of the foreign income can be excluded from U.S. taxable income due to various exclusion provisions, you cannot take a credit or deduction for the foreign taxes paid applicable to the excluded amounts.
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Access Form1116 from the IRS website and file it with Form 1040 to claim the foreign tax credit unless you are eligible to elect to take the credit without filing Form 1116. If you choose to deduct the foreign taxes instead of claiming them as a credit, they are taken as itemized deductions.
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Elect to not use Form 1116 if all of your foreign source income was from passive income such as dividends and interest, and all the foreign source income and taxes paid were reported to you on a qualified payee statement Form 1099. However, to avoid using Form 1116 the total of your foreign tax credits cannot be more than $300, or $600 if married filing jointly.
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Report foreign tax credits on Line 47 of Form 1040 if you are not electing to take them as an itemized deduction. If you are using Form 1116, refer to IRS Pub 514 to determine if there is a limitation on the credit allowed.
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