A limited amount of the foreign income tax you pay can be credited
against your U.S. tax liability or deducted in figuring taxable income
on your U.S. income tax return. It is usually to your advantage to
claim a credit for foreign taxes rather than to deduct them. A credit
reduces your U.S. tax liability, and any excess can be carried back
and carried forward to other years. A deduction only reduces your
taxable income and can be taken only in the current year. You must
treat all foreign income taxes in the same way. You generally cannot
deduct some foreign income taxes and take a credit for others.
Tax credit.
If you choose to credit foreign taxes against your tax liability,
complete Form 1116, Foreign Tax Credit (Individual, Estate,
Trust, or Nonresident Alien Individual), and attach it to your
U.S. income tax return. Do not include the foreign taxes paid or
accrued as withheld income taxes on Form 1040.
Limit.
Your credit cannot be more than the part of your U.S. income tax
liability allocable to your taxable income from sources outside the
United States. So, if you have no U.S. income tax liability, or if all
your foreign income is excludable, you will not be able to claim a
foreign tax credit.
If the foreign taxes you paid or incurred during the year exceed
the limit on your credit for the current year, you can carry back the
unused foreign taxes as credits to the 2 previous tax years and then
carry forward any remaining unused foreign taxes to the next 5 tax
years.
You will not be subject to this limit and may be able to claim the
credit without using Form 1116 if the following requirements are met.
- You are an individual.
- Your only foreign source income for the tax year is passive
income (dividends, interest, royalties, etc.) that is reported to you
on a payee statement (such as a Form 1099-DIV or
1099-INT).
- Your qualified foreign taxes for the tax year are not more
than $300 ($600 if filing a joint return) and are reported on a payee
statement.
- You elect this procedure for the tax year.
If you make this election, you cannot carryback or carryover any
unused foreign tax to or from this tax year.
Foreign taxes paid on excluded income.
You cannot claim a credit for foreign taxes paid on amounts
excluded from gross income under the foreign earned income exclusion
or the housing amount exclusion, discussed earlier.
Deduction.
If you choose to deduct all foreign income taxes on your U.S.
income tax return, itemize the deduction on Schedule A (Form 1040).
You cannot deduct foreign taxes paid on income you exclude from your
U.S. income tax return.
More information.
The foreign tax credit and deduction, their limits, and the
carryback and carryover provisions are discussed in detail in
Publication 514.
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