The foreign tax credit is intended to reduce the double tax burden that
would otherwise arise when foreign source income is taxed by both the United
States and the foreign country from which the income is derived.
Generally, only income taxes paid or accrued to a foreign country or a
U.S. possession, or taxes paid or accrued to a foreign country or U.S. possession
in lieu of an income tax, will qualify for the foreign tax credit. Qualified
foreign taxes do not include taxes that are refundable to you or taxes paid
to countries whose government is not recognized by the United States.
You can choose to take the amount of any qualified foreign taxes paid or
accrued during the year as a foreign tax credit or as an itemized deduction.
To choose the deduction, you must itemize deductions on Form 1040, Schedule A(PDF). To choose the foreign tax credit you generally must
complete Form 1116(PDF) and attach it to your Form 1040(PDF).
You can claim the credit for qualified foreign taxes without filing Form
1116 if all of the following requirements are met:
All of your foreign source income is passive income, such as interest
and dividends,
All of your foreign source income and the foreign taxes are reported to
you on a payee statement, such as Form 1099-INT(PDF) or Form 1099-DIV(PDF), and
The total of your qualified foreign taxes is not more than $300, or $600
if you are filing a joint return.
If you claim the credit directly on Form 1040 without filing Form
1116, you cannot carry back or carry over any unused foreign tax to or
from this year.
If you use Form 1116 to figure the credit, your foreign tax credit
will be the smaller of the amount of foreign tax paid or accrued, or the amount
of United States tax attributable to your foreign source income. This limit
is computed separately for each type of foreign income.
If you cannot use the full amount of qualified foreign taxes paid or accrued,
you may be allowed a 2–year carryback and then a 5–year carryover
of the unused foreign tax.
You may not take either a credit or a deduction for taxes paid or accrued
on income you exclude under the foreign earned income exclusion or the foreign
housing exclusion. There is no double taxation in this situation because the
income is not subject to United States tax.
For more information on the foreign tax credit (including information on
whether a particular tax is eligible for the credit), refer to the Instructions for Form 1116, or refer to Publication 514, Foreign
Tax Credit for Individuals. If the information you need is not addressed
in the Form 1116 instructions or in Publication 514, you
may call the IRS International Tax Law hotline. The number is area code (215)
516–2000. This is not a toll–free number.
