Internal Revenue Service United States Department of the Treasury
Level Basic Intermediate Advanced Military International

Foreign Tax Credit

Introduction

Definition (continued)

In most cases, it is to the taxpayer's advantage to take the foreign tax credit. In general, if the credit is chosen, you must take the credit for all qualified foreign taxes. However, if taxpayers paid foreign taxes that do not qualify for the credit, they may be able to itemize nonqualifying taxes as "Other Taxes" on Schedule A. Refer taxpayers with this situation to a professional tax preparer.

Tip

Review Publication 514, Foreign Tax Credit for Individuals, or the Form 1116 Instructions for more information.

Enter the foreign tax paid directly on Form 1040, page 2, keeping in mind the $300/$600 limitations.

Tip.

The foreign earned income exclusion is different from the foreign tax credit. Taxpayers can choose the approach that results in the lower tax paid overall:

  • The exclusion rules allow a portion of the foreign earned income to be excluded from taxable income, so it is not taxed
  • The credit rules add the foreign income to the taxable income and then reduces the U.S. tax due by some portion of taxes paid to the foreign government(s)

Try both methods to see which results in the lowest tax due.