Double taxation on foreign income is a problem that US expatriates and Green Card Holders face each year when they file their US income tax returns. Fortunately, there are several ways to avoid double taxation on your foreign income: the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). Each method (and, yes, even a combination of both) can provide US expats with a valuable benefit that is intended to reduce the double tax burden that would otherwise arise when their foreign source income is taxed by both the United States and the foreign country from which the income is derived.
The good news is many taxpayers can receive a bigger tax benefit from the Foreign Tax Credit than from claiming the Foreign Earned Income Exclusion. It has, for good reason, become a preferred method of avoiding double taxation.
But be aware that the foreign tax credit laws are complex and tax treaties complicate matters even more. That is the main reason that expats should always consult international tax professionals such as the experts at US Expat Tax Help when preparing their income tax returns.
Why choose the Foreign Tax Credit?
The Foreign Tax Credit is beneficial to many taxpayers living and paying income taxes overseas. If you are an expat that resides in a foreign country that has the same or a higher income rate than the US rate, the Foreign Tax Credit is almost always more advantageous to take than the Foreign Earned Income Exclusion. With the Foreign Tax Credit you can:
Who can qualify for the Foreign Tax Credit?
How do I qualify for the Foreign Tax Credit?
A taxpayer must meet the following four tests to qualify for the credit:
1. The tax must be imposed on you
2. You must have paid or accrued the tax
3. The tax must be a legal and actual foreign tax liability, and
4. The tax must be an income tax
Which income taxes or taxes in lieu of an income tax qualify for the foreign tax credit?
Generally, you can take the credit or deduction for
And if the
Which foreign taxes are not eligible for the foreign tax credit?
You cannot take the Foreign Tax Credit on
However, these foreign taxes may be eligible as part of your itemized deductions on Schedule A.
Which tax form do I use to claim the foreign tax credit?
You must file the Form 1116 to claim the foreign tax credit, however, several Form 1116s may have to be filed for each year depending if you have different categories of income. The complexity of the form itself and its 23 pages of instructions can be overwhelming. Not only does the Foreign Tax Credit need to be calculated for regular tax purposes for each category of income, but also for Alternative Minimum Tax (AMT) purposes. That is why it is wise to hire an international tax expert to help you with your tax returns. But read on.
You must file the Form 1116 with your income tax return for each of the following categories of income for which you are claiming a credit unless you meet one of the exceptions.
The exceptions include: