Paying income taxes to a foreign country or U.S. possession? Some people may qualify for either a tax credit or a deduction for those foreign tax payments when it comes time to pay their U.S. taxes.

The foreign tax credit is usually the best choice. According to the IRS, the foreign tax credit directly reduces a person's U.S. tax liability. When the foreign tax payment is taken as a deduction, taxable income is lessened by the amount of foreign income tax.

The IRS suggests taxpayers figure their taxes both ways to determine which works better for them.

Taxpayers cannot take credits or deductions for foreign taxes paid on income that is excluded from U.S. taxation, such as the foreign earned income exclusion, the foreign housing exclusion, or the possession exclusion.

Those claiming a foreign tax credit may also be liable for the alternative minimum tax. To find out if you are liable, complete Form 6251, Alternative Minimum Tax.

More details on these deductions are available in IRS Publication 514, Foreign Tax Credit for Individuals. To get forms and publications, write to the IRS Area Distribution Center, P.O. Box 85627, Richmond, VA 23285-5627, USA.

General Information | 1999 Tax Year Archives | Tax Help Archives | Home