Foreign Tax Credit
Did you accrue foreign taxes to a country outside of the US but are subject to US tax on the same income? Did you know that you may be able to qualify for either a credit or a deduction on those taxes? If you meet the following, you might qualify for a Foreign Tax Credit.
- The taxes must be imposed on you
- You must have paid or accrued the tax
- The tax must be the legal and actual foreign tax liability
- The tax must be an income tax
You can claim a credit on foreign taxes that are imposed on you by a foreign country. Taking this credit reduces your tax liability, and you won’t be paying double taxes on the same income. To claim this credit as an individual, estate or trust, you would file form 1116 – Foreign Tax Credit (Individual, Estate or Trust). As a corporation, you will file form 1118 – Foreign Tax Credit (Corporations).
Form 1116 should be prepared if your foreign taxes are more than $300 if filing single or $600 for married filing jointly, the income is non-passive and your foreign income and taxes were not reported on a 1099.
If you meet all of the following requirements, you can choose to claim the credit without filing form 1116.
- All of your foreign income is passive, such as interest and dividends, and the foreign tax paid was reported to you on form 1099-INT, 1099-DIV or Schedule K-1
- The total of your foreign taxes was not more than $300 if filing single or $600 if married filing jointly
- You held the stock or bond which the dividends or interest were paid for at least 16 days and weren’t obligated to pay these amounts to someone else
- You aren’t filing form 4563 or excluding income from sources within Puerto Rico
- All of your taxes were legally owed and not eligible for a refund or reduced tax rate under a tax treaty or paid to countries that are recognized by the United States and don’t support terrorism
Additionally, If you don’t claim the full amount, you can carry back or carryover the unused foreign income tax. You can carry back for one year, or carry forward for up to 10 years.
What types of taxes qualify for the credit?
Income, war profits and excess profits
- Salaries, wages and tips
- Commissions and bonuses
- Professional fees
- Certain allowances or reimbursement for cost of living, home leave or moving
- Dividend, interests and capital gains
- Gambling winning
- Social security benefits, pensions and annuities
- Business profits
- Certain scholarships or fellowships
- Employer-provided lodging, meals or use of a car
If you accrued foreign taxes and need assistance with your tax return, contact Murtha & Murtha CPAs by calling us at (813) 991-1120.