Rev. date: 10/2003
The foreign tax credit is intended to reduce the double tax burden that would otherwise arise when foreign source income is taxed by both the United States and the foreign country from which the income is derived.
Generally, only income taxes paid or accrued to a foreign country or a U.S. possession, or taxes paid or accrued to a foreign country or U.S. possession in lieu of an income tax, will qualify for the foreign tax credit. Qualified foreign taxes do not include taxes that are refundable to you or income taxes paid or accrued to any country if the income giving rise to the tax is for a period (the sanction period) during which:
- The Secretary of State has designated the country as one that repeatedly provides support for acts of international terrorism,
- The United States has severed or does not conduct diplomatic relations with the country, or
- The United States does not recognize the country's government, unless that government is eligible to purchase defense articles or services under the Arms Export Control Act.
You can choose to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction. To choose the deduction, you must itemize deductions on Form 1040, Schedule A
. To choose the foreign tax credit you generally must complete Form 1116
and attach it to your Form 1040
, or Form 1040-NR
You can claim the credit for qualified foreign taxes without filing Form 1116
if all of the following requirements are met:
- All of your foreign source income is passive income, such as interest and dividends,
- All of your foreign source income and the foreign taxes are reported to you on a qualified payee statement, such as Form 1099-INT or Form 1099-DIV, and
- The total of your qualified foreign taxes is not more than the limit given in the Instructions 1040 (General Inst.) for the filing status you are using, or in the Form 1040-NR Instructions (if you file Form 1040-NR).
If you claim the credit directly on Form 1040 or Form 1040-NR without filing Form 1116, you cannot carry back or carry over any unused foreign tax to or from this year.
If you use Form 1116 to figure the credit, your foreign tax credit will be the smaller of the amount of foreign tax paid or accrued, or the amount of United States tax attributable to your foreign source income. This limit is computed separately for each type of foreign income.
If you cannot use the full amount of qualified foreign taxes paid or accrued, you may be allowed a carryback and/or carryover of the unused foreign tax. How far you can carryback or carryover the unused foreign tax depends on the tax year for which you are filing. For more information on this topic see Publication 514
You may not take either a credit or a deduction for taxes paid or accrued on income you exclude under the foreign earned income exclusion or the foreign housing exclusion. There is no double taxation in this situation because the income is not subject to United States tax.
For more information on the foreign tax credit (including information on whether a particular tax is eligible for the credit), refer to the Instructions 1116
, or refer to Publication 514
, Foreign Tax Credit for Individuals
. If the information you need is not addressed in the instructions or in Publication 514, you may call the IRS International Tax Law hotline. The number is area code 215-516-2000. This is not a toll–free number.