Foreign Tax Credit – How to Figure the Credit

by | Jun 21, 2021 | All Great Easy Ways To Save Tax And Good Deductions | 0 comments

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Foreign Tax Credit – How to Figure the Credit

You can claim a foreign tax credit only for foreign taxes on income, war profits, or excess profits, or taxes in lieu of those taxes. In addition, there is a limit on the amount of the credit that you can claim. Your foreign tax credit is the amount of foreign tax you paid or accrued or, if smaller, the foreign tax credit limit.

You figure your foreign tax credit and the foreign tax credit limit on Form 1116, Foreign Tax Credit

Your foreign tax credit cannot be more than your total U.S. tax liability multiplied by a fraction. The numerator of the fraction is your taxable income from sources outside the United States. The denominator is your total taxable income from U.S. and foreign sources.

If you have foreign taxes available for credit but you cannot use them because of the foreign tax credit limit, you may be able to carry them back to the previous tax year and forward to the next 10 tax years. Refer to Carryback and Carryover in Publication 514, Foreign Tax Credit for Individuals.

Also, certain tax treaties have special rules that you must consider when figuring your foreign tax credit. Refer to Tax Treaties in Publication 514 and in Publication 901 U.S. Tax Treaties.

You will not be subject to the foreign tax credit limit and will be able to claim the foreign tax credit without using Form 1116 if all of the following requirements are met.

If you make this election, you cannot carry back or carry over any unused foreign tax to or from this tax year.

CAUTION! This election exempts you only from the limit figured on Form 1116, not from the other requirements described in Publication 514. For example, the election does not exempt you from the requirement that the foreign tax be a nonrefundable income tax.

For further details on computing the foreign tax credit refer to Publication 514, Foreign Tax Credit for Individuals and Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), including the Instructions for Form 1116.  In addition, refer to Foreign Tax Credit Compliance Tips.

For details on computing the foreign tax credit for corporations refer to Form 1118, Foreign Tax Credit – Corporations, and the Instructions for Form 1118.

 

Research & References of Foreign Tax Credit – How to Figure the Credit|A&C Accounting And Tax Services
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