If you paid or accrued foreign taxes to a foreign country or U.S. possession and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes.
Qualifying Foreign Taxes
You can claim a credit only for foreign taxes that are imposed on you by a foreign country or U.S. possession. Generally, only income, war profits and excess profits taxes qualify for the credit. See What Foreign Taxes Qualify For The Foreign Tax Credit? for more information.
Taken as a deduction, foreign income taxes reduce your U.S. taxable income. Deduct foreign taxes on Schedule A (Form 1040), Itemized Deductions
Taken as a credit, foreign income taxes reduce your U.S. tax liability. In most cases, it is to your advantage to take foreign income taxes as a tax credit.
If you choose to exclude either foreign earned income or foreign housing costs, you cannot take a foreign tax credit for taxes on income you can exclude. If you do take the credit, one or both of the choices may be considered revoked.
How to Claim the Foreign Tax Credit
File Form 1116, Foreign Tax Credit, to claim the foreign tax credit if you are an individual, estate or trust, and you paid or accrued certain foreign taxes to a foreign country or U.S. possession.
Corporations file Form 1118, Foreign Tax Credit—Corporations, to claim a foreign tax credit.
French Contribution Sociale Generalisee (CSG) and Contribution au Remboursement de la Dette Sociale (CRDS)
In 2019, the United States and the French Republic memorialized through diplomatic communications an understanding that the French Contribution Sociale Generalisee (CSG) and Contribution au Remboursement de la Dette Sociale(CRDS) taxes are not social taxes covered by the Agreement on Social Security between the two countries. Accordingly, the IRS will not challenge foreign tax credits for CSG and CRDS payments on the basis that the Agreement on Social Security applies to those taxes.
The IRS’s change in policy means individual taxpayers, who paid or accrued these taxes but did not claim them, can file amended returns to claim a foreign tax credit.
Generally individual taxpayers have ten (10) years to file a claim for refund of U.S. income taxes paid if they find they paid or accrued more creditable foreign taxes than what they previously claimed. The 10-year period begins the day after the regular due date for filing the return (without extensions) for the year in which the foreign taxes were paid or accrued. This means that amended returns may be filed, using Form 1040X to include accompanying Form 1116, going as far back as the 2009 tax year if the claim is filed within the 10-year period.
Individual taxpayers should write “French CSG/CRDS Taxes” in red at the top of Forms 1040-X, file them with accompanying Forms 1116 in accordance with the instructions for these forms. U.S. employers may not file for refunds claiming a foreign tax credit for CSG/CRDS withheld or otherwise paid on behalf of their employees.
The foreign tax credit laws are complex. Refer to Foreign Tax Credit Compliance Tips for help in understanding some of the more complex areas of the law. Below are some of the compliance issues:
- Foreign sourced qualified dividends and/or capital gains (including long-term capital gains, collectible gains, unrecaptured section 1250 gains, and section 1231 gains) that are taxed in the United States at a reduced tax rate must be adjusted in determining foreign source income on Form 1116, Foreign Tax Credit, line 1a.
- Interest expense must be apportioned between U.S. and foreign source income.
- Charitable contributions are usually not apportioned against foreign source income; however, contributions to charities organized in Mexico, Canada, and Israel must be apportioned against foreign source income.
- The amount of foreign tax that qualifies as a foreign tax credit is not necessarily the amount of tax withheld by the foreign country. If you are entitled to a reduced rate of foreign tax based on an income tax treaty between the United States and a foreign country, only that reduced tax qualifies for the credit. It is up to you whether you want to ask for a refund from the foreign country of the difference (excess) for which a foreign tax credit is not allowed.
- If a foreign tax redetermination occurs, a redetermination of your U.S. tax liability is required in most situations. You must file a Form 1040-X or Form 1120-X. Failure to notify the IRS of a foreign tax redetermination can result in a failure to notify penalty.
- A foreign tax credit may not be claimed for taxes on income that you exclude from U.S. gross income.