Foreign Tax Credit for Americans Living Abroad may help reduce double taxation when foreign-source income is taxed both by the United States and by another country.
U.S. citizens living overseas are generally subject to U.S. tax on worldwide income, but qualifying foreign income taxes paid or accrued may be eligible for a credit against U.S. federal income tax. In most cases, individuals claim the credit using Form 1116. Wakrim Law Firm assists Americans abroad with international tax filing, foreign tax credit issues, and related compliance matters.
The IRS explains that qualifying foreign income taxes may generally be claimed either as a credit or an itemized deduction, and that the credit directly reduces U.S. tax liability.
Foreign Tax Credit for Americans Living Abroad
The Foreign Tax Credit for Americans Living Abroad can help qualifying U.S. taxpayers reduce double taxation when foreign-source income is taxed by both the United States and another country.
Who qualifies for the Foreign Tax Credit?
U.S. citizens and resident aliens who pay or accrue qualifying foreign income taxes and are also subject to U.S. tax on foreign-source income may be eligible for the Foreign Tax Credit.
Eligibility depends on the nature of the foreign tax, the income to which it relates, and whether the tax satisfies the applicable IRS requirements.
To qualify for the Foreign Tax Credit, a foreign tax generally must:
- Be imposed on the taxpayer
- Be paid or accrued
- Represent the legal and actual foreign tax liability
- Be an income tax, or a tax in lieu of an income tax
What Foreign Taxes May Qualify?
Qualifying taxes generally include certain foreign income taxes imposed by a foreign country or U.S. territory.
Not every foreign tax qualifies. Property taxes, value-added taxes, social contributions, or other foreign levies may be treated differently depending on the facts and applicable rules.
How to Claim the Foreign Tax Credit
To claim the Foreign Tax Credit, individual taxpayers generally complete Form 1116 and attach it to their U.S. federal income tax return..
Certain taxpayers may qualify for an exception that allows them to claim the credit without filing Form 1116, but the applicable conditions should be reviewed carefully.
Foreign Tax Credit Limitation
The Foreign Tax Credit is generally limited so that it does not offset U.S. tax attributable to U.S.-source income.
The allowable credit is generally the lesser of the qualifying foreign taxes paid or accrued and the applicable Foreign Tax Credit limitation calculated under U.S. tax rules.
The IRS calculates the limitation using the ratio of taxable foreign-source income to total taxable income.
Can Unused Foreign Tax Credits Be Carried Forward?
Unused Foreign Tax Credits may, in certain cases, be carried back one year and carried forward for up to ten years.
The IRS generally allows eligible unused foreign taxes to be carried back one year and carried forward for up to ten years, subject to the applicable rules.
Foreign Tax Credit vs. Foreign Earned Income Exclusion
The Foreign Tax Credit and the Foreign Earned Income Exclusion are different tax mechanisms.
The Foreign Tax Credit may reduce U.S. tax based on qualifying foreign income taxes paid or accrued, while the Foreign Earned Income Exclusion may exclude qualifying foreign earned income from U.S. taxable income.
Taxpayers generally cannot claim a Foreign Tax Credit for foreign taxes attributable to income that has already been excluded under the Foreign Earned Income Exclusion.
The IRS specifically warns against claiming a credit or deduction for foreign taxes attributable to income excluded under the FEIE or foreign housing exclusion.
Learn more about the Foreign Earned Income Exclusion for Americans Abroad.
What If You Have Prior-Year U.S. Tax Filing Issues?
Americans living abroad sometimes discover that foreign tax credits, unfiled U.S. returns, FBARs, or other international reporting issues affect multiple tax years.
Prior-year compliance should generally be reviewed as a whole rather than correcting a single form or tax issue in isolation.
Review our guidance for Americans abroad with unfiled tax returns and, where appropriate, the Streamlined Foreign Offshore Procedures.
How Wakrim Law Firm Can Help Americans Abroad
Wakrim Law Firm assists U.S. taxpayers living overseas with foreign tax credit issues, Form 1116, international tax reporting, and prior-year compliance matters.
Our assistance may include reviewing qualifying foreign taxes, evaluating the interaction between the Foreign Tax Credit and the Foreign Earned Income Exclusion, and identifying other U.S. filing or reporting obligations.
For broader guidance on U.S. tax filing and international reporting obligations, explore our U.S. tax services for Americans living abroad.
Wakrim Law Firm assists taxpayers with Foreign Tax Credit for Americans Living Abroad matters, Form 1116, and related international tax compliance.
Contact Wakrim Law Firm to discuss your U.S. tax situation while living abroad.
Frequently Asked Questions About the Foreign Tax Credit
Can Americans living abroad claim a Foreign Tax Credit?
Yes. The Foreign Tax Credit for Americans Living Abroad may be available when qualifying foreign income taxes have been paid or accrued on foreign-source income.
What form is used to claim the Foreign Tax Credit?
Individuals generally use Form 1116 to calculate and claim the Foreign Tax Credit, unless they qualify for an applicable exception.
Can I claim both the Foreign Tax Credit and the Foreign Earned Income Exclusion?
Potentially, but the same foreign income cannot generally be used to obtain overlapping benefits. Foreign taxes attributable to income excluded under the FEIE generally cannot also generate a Foreign Tax Credit.
Can unused Foreign Tax Credits be carried forward?
In certain cases, unused credits limited in the current year may be carried back one year and carried forward for up to ten years.