Foreign Tax Credit
What is Foreign Tax Credit?
Let’s start off by defining exactly what a Foreign Tax Credit is and who it’s for. The Foreign Tax Credit is for anybody who has an investment income(s) from a foreign (outside the U.S.) source or makes money while working abroad. The Foreign Tax Credit is considered a non-refundable tax credit for income taxes paid to a foreign country (that is not considered a supporter of terrorist activities).
To put it simply, the Foreign Tax Credit is a tax break made available to U.S. taxpayers by the U.S. government in order to help lower the tax liability of certain taxpayers with foreign income.
To accomplish this, the Foreign Tax Credit is applied to how much tax one owes after all their tax deductions are tallied and applied to one’s taxable income. It decreases one’s total tax bill dollar to dollar.
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Foreign Taxes that do not Qualify
According to the IRS, you cannot claim a Foreign Tax Credit for these items:
• Taxes on foreign mineral income
• Taxes related to a foreign tax splitting event
• A portion of taxes from international boycott operations
• Social security taxes paid or accrued to a foreign country who the U.S. has a social security agreement
• A portion of taxes on combined gas and foreign oil income
• Taxes on excluded income
• Taxes of U.S. persons controlling foreign corporations and partnerships who fail to file required information returns
• Taxes for which you can only take an itemized deduction
What Foreign Taxes Qualify for a Credit?
The IRS has put together 4 tests to help determine if a foreign tax qualifies for credit. These are the 4 tests:
1. The tax must be levied on you by a foreign country or U.S. possession.
2. You paid or accumulated the tax.
3. The tax has to be the Legal and Actual Foreign Tax Liability.
4. The tax must be an income tax.
To read about these tests more in-depth, please visit the IRS website at -> https://www.irs.gov/individuals/international-taxpayers/what-foreign-taxes-qualify-for-the-foreign-tax-credit#taxmustbethelegal
Call Our Orlando Office at (407) 382-6658 to Schedule Your Initial Consultation
Tax Form 1116
Based on the IRS Foreign Tax Credit Test and what foreign taxes don’t qualify for a credit, if you feel you still qualify for a Foreign Tax Credit(s), then IRS Form 1116 will help you claim your necessary tax credits.
Now we would like to offer a word of caution, this form is not easy to fill out and is a bit cumbersome. You do not want to zip your way through this form without paying attention to the details. So, if you are doing this by yourself, be sure to block out plenty of time in your day. As it turns out, the average person spends 4 hours filling out Form 1116. That’s a good bit of time for a single tax form.
To download IRS Form 1116, please visit -> https://www.irs.gov/pub/irs-pdf/f1116.pdf and as always, if you have any tax-related questions, we are here to help. You are just a phone call away.