The foreign tax credit is intended to relieve U.S. taxpayers of the double tax burden
when their foreign source income is taxed by both the United States and the foreign
country from which the income is derived.
Generally, only income taxes paid or accrued to a foreign country or a U.S. possession
qualify for the foreign tax credit. Under certain conditions, however, taxes paid or
accrued to a foreign country or U.S. possession, in lieu of an income tax, will qualify.
You can choose to take the amount of any qualified foreign taxes paid or accrued during
the year as a foreign tax credit or as an itemized deduction. To choose the foreign tax
credit you must complete Form 1116 and attach
it to your Form 1040. To choose the deduction, you must itemize
deductions on Schedule A, Form 1040. You may not take either a credit or a deduction for
taxes paid or accrued on income you exclude under the foreign earned income exclusion or
the foreign housing exclusion. There is no double taxation in this situation because the
income is not subject to U.S. tax.
Your foreign tax credit will be the smaller of the amount of foreign tax paid or
accrued, or the amount of U.S. tax attributable to your foreign income. This limit is
computed separately for each type of foreign income.
If, because of the credit limit, you cannot use the full amount of qualified foreign
taxes paid or accrued, you are allowed a 2-year carryback and then a 5-year carryover of
the unused foreign tax. For more information, order Publication 514, Foreign Tax Credit for
Individuals, by calling 1-800-829-3676.
If the information you need relating to this topic is not addressed in Publication 514,
you may call the IRS National Office hotline. The number is (202) 874-1460. This is not a
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