Answers to Common Questions About the Foreign Tax Credit

Over the years, we've been asked many questions by our clients in regard to the foreign tax credit (FTC). We though it would be helpful to compile the most frequently asked questions we receive along with comprehensive answers. We hope you fine it helpful.

What are foreign tax credits?

Foreign tax credits are credits that U.S. taxpayers can apply to their US tax likability based on the taxes they pay to a foreign government. This system prevents double taxation and is governed by specific rules outlined in U.S. tax treaties with various countries.

Who is eligible for foreign tax credits?

U.S. taxpayers who earn income from foreign sources and pay taxes to foreign governments are typically eligible. The specifics can depend on the U.S. tax treaty with the particular foreign country.

How do I claim foreign tax credits?

You can claim foreign tax credits by completing Form 1116 and attaching it to your U.S. tax return. This form requires details about the foreign income and the taxes paid, and it helps calculate the amount of tax credit you're eligible to receive.

What happens if I don't use all of my foreign tax credits this year?

You may be able to carry over or carry back excess foreign tax credits to other tax years. Specific rules govern how you can apply these carryovers or carrybacks.

Can you carry forward excess foreign tax credit?

Yes, if you have paid or accrued more foreign taxes to a foreign country or U.S. possession than the limit on your foreign tax credit, you can carry over the unused part to the following year. This carryover can be utilized for up to 10 years.

How long can you carry forward the foreign tax credit?

You can carry forward excess foreign tax credits for up to 10 years. If they are not used to reduce your U.S. tax liability within that period, they expire.

What is the difference between a carryover and a carryback?

A "carryover" refers to applying excess credits to future tax years, while a "carryback" involves applying excess credits to past tax years. Foreign tax credits have a carryover period of 10 years and a carryback provision for 1 year.

Is there a limit on the foreign tax credit?

The foreign tax credit is limited to the lesser of the actual foreign taxes paid or the U.S. tax liability on the foreign income. This is to prevent you from receiving a double benefit from the credits.

How do I accrue foreign tax credit?

You accrue foreign tax credits in the year in which the taxes were paid or accrued, depending on your method of accounting. For cash method taxpayers, credits are accrued in the year paid. For accrual method taxpayers, it's in the year the tax liability is incurred.

Can you get a refund from foreign tax credit?

The foreign tax credit is generally non-refundable, which means it can only reduce the U.S. tax liability to zero.

Can I claim a deduction instead of a credit for foreign taxes?

Yes, you can choose to deduct foreign taxes instead of claiming them as a credit. The deduction comes off your income, while the credit offsets your U.S. tax liability directly.

What are the documentation requirements for claiming foreign tax credits?

You need to keep proof of foreign taxes paid, which can include foreign tax returns, receipts, or statements from the foreign taxing authority.

What if a foreign country refunds the tax I've already claimed as a credit?

If you receive a refund of foreign taxes for which you've already claimed a credit, you may need to amend your U.S. tax return. This situation could result in a change to your tax liability.

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Article by Lewis Grunfeld, CPA

Lewis Grunfeld, CPA, is a renowned expert in international and U.S. expat taxation, with expertise spanning over ten years. He has successfully helped thousands of expats around the world navigate complex international U.S. tax regulations, and achieve significant tax savings. His work is driven by a strongly rooted passion for assisting the expat community through a wide range of tax situations, ensuring tailored solutions for each unique situation.