Are you a U.S. Expat? And about to pay tax on the income earned by you in a foreign country? Or, are you a U.S. resident who has a source of bountiful income in a foreign nation? With 15th June, (Extended U.S. tax deadline for expats) getting closer, it’s best if you are aware of all the tax scenarios before you go on to file your returns.
First, decide which country are you planning to pay this tax to? The country you are working in or in the U.S.? Because the IRS taxes the global income for US nationals, resident or not.
This where the Foreign Tax Credit comes into the picture. And we are here to tell you all about it to help you retain the maximum amount of your income.
The essence of Foreign Tax Credit
If you are a resident U.S. citizen accruing income from some foreign country or living/working there, this does not imply that you are free from the U.S. tax laws and neither does this mean that you need to pay taxes to both countries. As per U.S. tax laws, you would need to pay taxes to the IRS for any income you have earned in a foreign country. However, if you have paid the same tax to the country you are working in, then you could be eligible for a Foreign Tax Credit for the said amount. Thus, you will avoid the burden of double taxation.
How to claim the Foreign Tax Credit?
The first point to keep in mind is that the Foreign Tax Credit (FTC) can only be claimed on the exact amount of income, war profit or excess profit taxes paid to the foreign government. By claiming the FTC, you can reduce your U.S. taxable income and take advantage of this tax credit to reduce your tax liabilities.
You will need to fill Form 1116 if you are an individual, estate or trust. However, if you want to claim this credit as a corporation, then you would need to fill the Form 1118 to process your Foreign Tax Credit.
Want to exclude your foreign earned income from U.S. gross income?
If you wish to exclude your foreign earned income or foreign housing costs from the U.S. gross taxable income, it is possible, but then you cannot claim the Foreign Tax Credit on the income that you have excluded.
Only Imposed Taxes qualify for Foreign Tax Credit
To avail Foreign Tax Credit, there is a necessary condition that such taxes shall be imposed on you. For example, a tax deducted directly from your salary is an imposed tax and you can claim Foreign Tax Credit on such deductions.
Foreign Tax Credit can be claimed only on Actual Tax Accrued
Foreign Tax Credit can only be availed on the actual tax liability imposed on you, i.e. if you receive a refund on the tax paid to the foreign government, the qualified amount would be the tax paid minus the refund received by you and the FTC can be claimed on that actual amount only.
There are many more such regulations that accompany a Foreign Tax Credit like, how to claim someone as a dependent, or what items cannot be claimed as a foreign tax credit, or in what conditions you may exclude income accrued by you from U.S. gross income etc. Contact us at MyTaxFiler to resolve all your queries regarding Foreign Tax Credit.
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