|You can claim an itemized
tax deduction for foreign taxes paid on your tax return, or you can claim the
foreign tax credit on your tax return, which is intended to reduce the double tax burden that would otherwise
arise when foreign source taxable income is taxed by both the United States and the foreign
country from which the taxable income is derived.
Generally, only income
tax paid or accrued
to a foreign country or a U.S. possession qualify for the foreign tax credit
on your tax return. Under
certain conditions, however, tax paid or accrued to a foreign country or U.S. possession
in lieu of an income tax will qualify for the foreign tax credit on your tax return. You may not claim a foreign tax credit or tax deduction
on your tax return for tax paid on taxable income not subject to U.S. tax.
Who can claim the foreign tax credit on their tax return?
The foreign tax credit may not be claimed
on your tax return if:
|You are a nonresident alien (under most circumstances);|
|You are a citizen of a U.S. Possession (except Puerto Rico) but not a U.S. citizen or
To choose to take the itemized
tax deduction on your tax return, you must itemize tax deductions on Form 1040, Schedule A. To choose the foreign tax credit on your
tax return you generally must complete Form 1116 and attach it to your
Your foreign tax credit on
your tax return will be the smaller of the amount of foreign tax paid or foreign tax
accrued, or the amount of U.S. tax attributable to your foreign income. This limit is
computed separately on your tax return for each type of foreign income.
For tax years beginning in 1998, you will not be subjected to this limit (and
therefore will not need to file Form 1116 to claim the foreign tax
credit on your tax return) if all of the following requirements are met:
|You are an individual.|
|Your only gross
taxable income from foreign sources for the tax year is passive income that is
reported to you on a payee statement (such as an Form 1099-DIV or Form 1099-INT).|
|Your qualified foreign
tax for the tax year is not more than $300 ($600 if you are
filing a joint tax return) and are reported on a payee statement.|
|You elect this procedure for the tax year.|
If you make this tax election, you cannot carry back or carry
forward any unused foreign tax
to or from this tax year on another IRS tax return.
If you do not make this tax election and, because of the
foreign tax credit limit determined on your Form 1116, you cannot use the
full amount of qualified foreign tax paid or foreign tax accrued you are allowed a 2-year carry
back and then a 5-year carry forward of the unused foreign tax.
You cannot take either the
foreign tax credit or the tax deduction for tax paid or accrued on income
you exclude under the foreign earned income exclusion or the foreign housing
exclusion on your tax return.
There is no double taxation in this situation because the income is not subject to U.S.