TAXES > Individuals > Deductions and Credits > Foreign Tax Credit (Form 1116)

Foreign Tax Credit

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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