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TAXES
> Individuals > Deductions
and Credits > Foreign Tax Credit (Form 1116)
Most
U.S. taxpayers who pay income taxes to foreign governments may deduct
those taxes for U.S. tax purposes or may credit them dollar-for-dollar
against their U.S. income tax liability. The foreign tax credit is elective
and is allowed against U.S. income tax for income tax paid to a foreign
country (or province, state, city, etc., thereof) or U.S. possession.
Taxpayers may choose each year between taking a credit or a deduction
for foreign income taxes. If credit is claimed for any foreign income
taxes, no deductions may be claimed for other foreign income taxes, but
other foreign taxes otherwise deductible (e.g., foreign real property
taxes) may be deducted. IRS will issue regs to disallow foreign tax credits
for abusive tax-motivated transactions that yield little economic benefit
relative to expected U.S. tax benefits. Except for the "deemed" foreign
tax paid, the credit is allowed only to the person on whom the tax was
imposed, but a U.S. citizen or resident alien, who is a member of a partnership
or a beneficiary of an estate or trust, or stockholder of a regulated
investment company that made the necessary election, may claim (as a credit)
his share of the foreign tax paid or accrued by the partnership, estate,
trust or mutual fund. On a joint return, the credit is for the taxes of
both spouses. Credit is allowed to U.S. citizens (except to the extent
they are entitled to U.S. tax exemption for earned income from U.S. possessions
and foreign countries), domestic corporations or electing possessions
corporations, aliens residing in the U.S., or residing during the entire
tax year in Puerto Rico, partners or beneficiaries of an estate or trust
who are U.S. citizens, residents of the U.S. or Puerto Rico, alien residents
of the U.S. or Puerto Rico, or nonresident aliens described below, settlers
or other persons who would be treated as owners of a foreign trust but
for Code Sec. 672(f), domestic or resident estates and trusts (to the
extent allocable to the estate or trust rather than the beneficiaries),
stockholders of a DISC or former DISC, and FSCs to a limited extent. Nonresident
aliens and foreign corporations can claim the credit only for foreign
or possessions tax on certain income effectively connected with their
U.S. business. There is a limitation on the credit for alternative minimum
tax purposes.
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