Taxpayers who paid income, war profits, or excess profits taxes to any foreign country or U.S. possession may be able to take a Foreign Tax Credit (FTC) for taxes paid. The Foreign Tax Credit can only be claimed using Form 1040.
Foreign Country includes any political subdivision, or agency or instrumentality of the country or possession.
U.S. citizens and residents compute their U.S. taxes based on their worldwide income. This sometimes results in U.S. citizens having to pay tax twice on the same income: once to the government of the foreign country where the income was sourced and once to the U.S. government.
The Foreign Tax Credit was created to help taxpayers avoid this double taxation. It allows taxpayers to take a tax credit for taxes paid to a foreign government on foreign source income that is subject to U.S. tax.
To qualify for the credit, a taxpayer must:
- Have income from a foreign country
- Have paid taxes on that income to the same foreign country
- Not have claimed the foreign earned income exclusion on the same income
The Foreign Tax Credit is a dollar-for-dollar reduction in the amount of U.S. tax. However, in some cases, not all taxes paid to a foreign government can be used in the computation of the Foreign Tax Credit.