In some cases, you can claim a credit or take a deduction for foreign income tax you pay. It is usually to your advantage to claim a credit for foreign taxes rather than to deduct them. A credit reduces your U.S. tax liability, and any excess can be carried back and carried forward to other years. A deduction only reduces your taxable income and can be taken only in the current year. You generally cannot deduct some foreign income taxes and take a credit for others. taxmap/pubs/p593-003.htm#en_us_publink100012057
If you choose to claim a credit for foreign taxes, you generally must complete Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), and attach it to your U.S. income tax return. Do not include the foreign taxes paid or accrued as withheld income taxes on Form 1040. taxmap/pubs/p593-003.htm#en_us_publink100012058
Your credit cannot be more than the part of your U.S. income tax liability based on your taxable income from sources outside the United States. So, if you have no U.S. income tax liability, or if all your foreign income is excludable, you will not be able to claim a foreign tax credit.
If the foreign taxes you paid or incurred during the year are more than the limit on your credit for the current year, you can carry back the unused foreign taxes as credits to the previous year and then carry forward any remaining unused foreign taxes to the next 10 years.
You will not be subject to this limit and may be able to claim the credit without using Form 1116 if the following requirements are met.
- You are an individual.
- Your only foreign source income for the year is passive income (dividends, interest, royalties, etc.) that is reported to you on a payee statement (such as a Form 1099-DIV or 1099-INT).
- Your qualified foreign taxes for the year are not more than $300 ($600 if filing a joint return) and are reported on a payee statement.
- You elect this procedure for the year.
If you make this election, you cannot carry back or carry over any unused foreign tax to or from this year.
You cannot claim a credit for foreign taxes paid on amounts excluded from gross income under the foreign earned income exclusion or the housing amount exclusion, discussed earlier. taxmap/pubs/p593-003.htm#en_us_publink100012062
If you choose to deduct all foreign income taxes on your U.S. income tax return, itemize the deduction on Schedule A (Form 1040). You cannot deduct foreign taxes paid on income you exclude from your U.S. income tax return. taxmap/pubs/p593-003.htm#en_us_publink100012063
The foreign tax credit and deduction, their limits, and the carryback and carryover provisions are discussed in detail in Publication 514.