The foreign tax credit intends 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 or U.S. territory. Qualifying tests for a credit The tax must meet four tests to qualify for the credit: The tax must be imposed on you. You must have paid or accrued the tax. The tax must be a legal and actual foreign tax liability. The tax must be an income tax (or a tax in lieu of an income tax). Generally, only income taxes paid or accrued to a foreign country or a U.S. territory, or taxes paid or accrued to a foreign country or U.S. territory in lieu of an income tax, will qualify for the foreign tax credit. Note: Certain foreign taxes do not qualify for the credit even if the four tests are met. Foreign taxes that don't qualify for a credit: Taxes paid to a foreign country that you don't legally owe, including amount eligible for a refund by the foreign country. Taxes paid to a foreign country that are offset or reduced by a tax credit. Taxes imposed by a foreign country only because you could claim a foreign tax credit against the U.S. tax liability for such foreign income taxes paid or accrued. Taxes imposed by and paid to certain foreign countries. These countries are those designated by the Secretary of State as countries that repeatedly provide support for acts of international terrorism, countries with which the United States doesn't have or doesn't conduct diplomatic relations, or countries whose governments aren't recognized by the United States and aren't otherwise eligible to purchase defense articles or services under the Arms Export Control Act. For a list of these countries, see Publication 514, Foreign Tax Credit for Individuals. Foreign taxes withheld on a dividend from a corporation, if you haven't held the stock for at least 16 days within the 31-day period that begins 15 days before the ex-dividend date. This required holding period is greater for preferred-stock dividends attributable to periods totaling more than 366 days. See section 901(k)(3) or Publication 514 PDF. Foreign taxes withheld on a dividend to the extent that you have to make related payments on positions in substantially similar or related property. Foreign taxes withheld on income or gain (other than dividends) from property if you haven't held the property for at least 16 days within the 31-day period that begins 15 days before the date on which the right to receive the payment arises. See section 901(l) or Publication 514. Foreign taxes withheld on income or gain (other than dividends) from property to the extent you have to make related payments on positions in substantially similar or related property. Foreign taxes that are used to provide, directly or indirectly, a subsidy to you, a person or business related to you, or any party transacting with you. Taxes paid or accrued to a foreign country in connection with the purchase or sale of oil or gas extracted in that country if you don't have an economic interest in the oil or gas, and the purchase price or sales price is different from the fair market value of the oil or gas at the time of the purchase or sale. Foreign taxes paid or accrued on income for which you are claiming an exclusion on Form 8873, Extraterritorial Income Exclusion. However, see section 943(d) for an exception for certain withholding taxes. Taxes on foreign mineral income. See Treas. Reg. § 1.901-3. The disqualified portion of any foreign tax paid or accrued in connection with a covered asset acquisition. Covered asset acquisitions include certain acquisitions that result in a stepped-up basis for U.S. tax purposes. For more information, see section 901(m) and the regulations under that section. Foreign taxes disallowed under section 965(g). See Treas. Reg. § 1.965-5. You can't take a credit for any interest or penalties you must pay. For more information, see Foreign Taxes for Which You Cannot Take a Credit in Publication 514. Choosing a credit or a deduction Instead of claiming a credit for eligible foreign taxes, you can choose to deduct foreign income taxes. To choose the deduction, you must deduct foreign income taxes on Schedule A (Form 1040), Itemized Deductions. To choose the foreign tax credit, you generally must complete Form 1116 and attach it to your Form 1040, Form 1040-SR or Form 1040-NR. You must choose either the foreign tax credit or itemized deduction for all foreign taxes paid or accrued during the year. This is an annual choice. However, even if you take the credit for eligible foreign taxes for the year, you can take a deduction for the following: Foreign taxes not allowed as a credit because of boycott provisions. Taxes paid to certain foreign countries for which a credit has been denied, as described in item 4 above. Taxes on income or gain that aren't creditable because you don't meet the holding period requirement, as described in item 5 or 7 above. Taxes on income or gain that aren't creditable because you have to make related payments, as described in item 6 or 8 above. Certain taxes paid or accrued to a foreign country in connection with the purchase or sale of oil or gas extracted in that country, as described in item 10 above. Taxes on income or gain that aren't creditable because they were paid or accrued in connection with a covered asset acquisition, as described in item 13 above. If you are an accrual basis taxpayer or if you elected to claim your foreign tax credit on an accrual basis, taxes paid that relate to a prior tax year in which you elected to claim a deduction instead of a credit in that prior year. See Regulations section 1.901-1(c)(3). If you're a cash basis taxpayer, you can only take the foreign tax credit in the year you pay the foreign taxes unless you elect to claim the foreign tax credit in the year the taxes are accrued by checking the "Accrued" box in Part II of Form 1116 on a timely filed original return. Once you make this election, you must credit foreign taxes in the year they accrue on all future returns. Foreign earned income and housing exclusions You may not take either a credit or a deduction for the portion of foreign taxes paid or accrued on income you exclude under the foreign earned income exclusion or the foreign housing exclusion. There's no double taxation in this situation because that income isn't subject to U.S. income tax. See Publication 54 for more information on the foreign earned income and housing exclusions. Computing the credit when filing Form 1116 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 U.S. tax attributable to your foreign source income. Compute the limit separately for passive income, income resourced under a tax treaty, section 901(j) income derived from sanctioned countries, income included under section 951A, foreign branch income, and general category income. Also, certain tax treaties have special rules that you must consider when figuring your foreign tax credit. See "Tax Treaties" in Publication 514. Carryback and carryover of unused credit If you can't claim a credit for the full amount of qualified foreign income taxes you paid or accrued in the year, you're allowed a carryback and/or carryover of the unused foreign income tax, except that no carryback or carryover is allowed for foreign tax on income included under section 951A. You can carry back for one year and then carry forward for 10 years the unused foreign tax. For more information on this topic, see Publication 514. Claiming without filing Form 1116 For every tax year, you can elect to claim the credit for eligible foreign taxes without filing Form 1116 if you meet all of the following requirements: All of your foreign source gross income is passive income, such as interest and dividends, All of your foreign source gross income and the foreign income taxes are reported to you on a qualified payee statement, such as Form 1099-INT, Form 1099-DIV, or Schedule K-1 from a partnership, S corporation, estate or trust, and, The total of your qualified foreign taxes isn't more than the limit given in the Instructions for Form 1040 (and Form 1040-SR) PDF for the filing status you're using, or in the Instructions for Form 1040-NR PDF (if filing Form 1040-NR). If you claim the credit without filing Form 1116, you can't carry back or carry forward any unused foreign tax to or from this year. This election isn't available to estates or trusts. Amending your return to claim the tax credit If you claimed an itemized deduction for a given year for eligible foreign taxes, you can choose instead to claim a foreign tax credit that'll result in a refund for that year by filing an amended return on Form 1040-X within 10 years from the original due date of your return. The 10-year period also applies to calculate corrections of your previously claimed foreign tax credit. If the foreign income taxes you claimed as a credit are refunded to you or otherwise reduced, you must file an amended return on Form 1040-X reporting the reduced foreign tax credit no later than the due date (with extensions) of your return for the year in which the foreign taxes were refunded or reduced. Additional information Instructions for Form 1116 Foreign tax credit Am I eligible to claim the foreign tax credit? Publication 514, Foreign Tax Credit for Individuals U.S. citizens and resident aliens abroad Should I file an amended return?
