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Taxes: Can I claim the foreign tax credit?

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  • Who can claim the foreign tax credit?
  • Learn the exceptions and compliance issues.

Do you know what the foreign tax credit is? This is a credit granted by the Internal Revenue Service to those taxpayers who paid or accrued taxes in a foreign country or a US possession.

This helps taxpayers receive a credit or an itemized deduction for those taxes, so that income isn’t taxed twice. Both US citizens and resident immigrants have the option of claiming it. Learn more!

What is the foreign tax credit?

foreign tax credit

The foreign tax credit is used to offset taxes paid to foreign governments. US citizens or immigrants residing in the US who pay taxes in a foreign nation or US possessions are qualified to claim it.

When a US taxpayer is subject to tax in a foreign nation or US possession such as Puerto Rico, the Virgin Islands, Guam, the Northern Mariana Islands, or American Samoa, they have the option of filing an itemized tax return or obtaining a credit for taxes paid in that country.

Who can claim the foreign tax credit?

Trust tax

One aspect to consider before claiming the foreign tax credit is that not all taxes paid to a foreign government can be claimed as a credit. For this, it is necessary to cover several requirements, among them: the tax is paid to a foreign nation, that the taxpayer has paid or acquired the tax in a foreign nation, that the tax is legitimate and that it is a tax on income .

Who qualifies for the foreign tax credit? According to the IRS, those who qualify are individuals, heirs, trusts, foundations or corporations that have paid or acquired foreign taxes. Depending on the category, they must fill out forms 1116 or 1118.

When the foreign tax credit applies

foreign tax credit

To claim the foreign tax credit, it is necessary to meet several requirements, such as that the tax is automatically deducted by a foreign country, that the taxes have been paid, and that these are the only tax liability incurred in the fiscal year.

Taxes paid or earned on gross annual salary, war profits, and excess taxes on benefits paid or earned in a foreign nation qualify for this type of credit. Taxes on wages, dividends, interest and royalties also qualify.

Compliance issues

Form 1116

The IRS indicates that the foreign tax credit has some compliance issues. In order to claim it, it is necessary to meet requirements such as that the charitable contributions made in Mexico, Canada and Israel are provided against the foreign source of income.

It is also noted that the amount of foreign tax that qualifies for the tax credit is not always the same as the tax held by the foreign country. With this, you can request a refund of the difference when the credit is rejected.

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