The Foreign Tax Credit (FTC) is a money-saving credit that the IRS offers to help offset the penalty of double taxation. Four conditions must be met by the taxpayer:
- Taxpayer must have a foreign tax liability that was either paid or accrued during the current tax year,
- The tax must be assessed on income,
- The tax must be imposed on you as an individual, and
- The tax must have originated legally in a foreign country.
When it comes to foreign tax, the taxpayer has two options. Essentially, taxpayers can choose annually between the international tax credit and the itemized deduction for foreign taxes.
The credit is more advantageous than the deduction since credits lower taxes dollar-for-dollar, but deductions do not. In certain circumstances, however, it may be advantageous to claim the deduction rather than the foreign tax credit.
There are a few exceptions to the general rule that taxpayers must file Form 1116 to claim the foreign tax credit if they intend to utilize it. If any of the following are true, the taxpayer may claim the foreign tax credit without filing Form 1116:
- Passive income is the foreign income source for the tax year.
- The total amount of qualified foreign taxes for the year cannot exceed $300 USD or $600 USD if submitting a combined tax return.
- Gross foreign income and foreign taxes are disclosed on payee statements such as Form 1099, dividend or interest 1099.
In general, this will only apply to those with a very little amount of foreign-sourced income tax liability.
For instance, if you own shares of a foreign company and receive a tiny dividend in the amount of $200 or something similar. The IRS does not require you to file Form 1116 in these instances, but you can still claim the foreign tax credit on the dividend or interest income you earned from these assets.
Certain sanctioned countries are ineligible for a foreign tax credit for foreign income taxes levied by, paid to, or accrued to them. Even though FTCs are not permitted for these taxes, the taxpayer may claim an itemized deduction for them in certain circumstances.
FTC is a nonrefundable credit. When FTC is limited in a specific year, foreign taxes that cannot be utilized in that year can be carried back or carried forward.
To claim a credit, the taxpayer may be required to submit multiple Form 1116. Allow us to assist you obtain credit. To address your case, please dial 908.300.9193.
