Income taxes paid or accrued during the year to a foreign country or U.S. possession can be deducted as a credit against your U.S. income tax or included as an itemized deduction.
However there is a limit on the credit: the foreign tax credit can’t be more than your U.S. tax liability, multiplied by a fraction:
- The numerator of the fraction is the taxable income from sources outside the United States.
- The denominator is the total taxable income from U.S. and foreign sources.
Taxpayers need to file Form 1116 to take the credit.
They can elect not to file this form 1116 to take the credit if all the following conditions are met:
- All their foreign income was from interest and dividends reported on form 1099 (DIV or INT) or schedule K1 or comparable/substitute statement.
- The stock or bonds on which the dividends and interest were paid for at least 16 days and weren’t obligated to pay these amounts to someone else.
- Form 4563 is not filed (or excluding income from sources within Puerto Rico).
- The total of the foreign taxes wasn’t more than $300 (not more than $600 if married filing jointly).
- All of the foreign taxes were legally owed and not eligible for a refund or reduced tax rate under a tax treaty, and paid to countries that are recognized by the United States and don’t support terrorism.
I created this blog to help understand certain basic aspects of U.S. tax law. Of course, each situation is unique and nothing that is on this site will ever replace the expert advice of a tax professional.
Please do not hesitate to contact me should you have any question