Foreign Tax Credit

France Promises 1 Billion Euro Tax Cut In 2017

In September 2015, French President Francois Hollande promised households a 1 billion-euro ($1.1 billion) tax cut next year. Why such benevolence?  Hollande’s government was attempting to make up for the glut of gross domestic product (GDP) that was taken by his government in taxes in 2014.

Finance Minister Michel Sapin said “we’re doing it because it’s both fair and necessary.” Both France and Belgium collected the equivalent of 47.9 percent of gross domestic product in 2014. France’s finance ministry estimated that taxation and social charges have fallen from 44.9 percent of GDP in 2014 to 44.5 percent this year.

Which One Should I Use? The Foreign Housing Deduction? Or Exclusion?

In addition to the foreign earned income exclusion, taxpayers may also claim an exclusion or a deduction from gross income for an expenditure for housing if the home of the tax is in a foreign country and they qualify for the exclusions and deduction under either the bona fide residence test or the physical presence test.

The housing exclusion applies only to amounts which are treated as paid by an employer, which includes any amounts paid to a taxpayer or paid or incurred on a taxpayer’s behalf by his or her employer that are taxable foreign earned income for the year. In contrast, the housing deduction applies only to amounts paid for with earnings from self-employment. Thus, the source of the amounts paid typically determine use of the deduction or exclusion.

Claiming The Foreign Tax Credit With Or Without Filing Form 1116

Form 1116 relates to foreign tax credits, which are intended to affect taxpayers living abroad. These credits benefit foreign taxpayers by reducing the double tax burden that arises when foreign source income is taxed by both the United States and the foreign country where the taxpayers’ income originates.

The foreign tax must meet four tests to qualify for the foreign tax credit:

  1. The tax must be a legal and actual foreign tax liability;
  2. The tax must be imposed on the taxpayer claiming the credit;
  3. The taxpayer must have paid or accrued the tax; and

Foreign Tax Credit For Individuals

Federal tax law provides the foreign tax credit to relieve taxpayers of the double tax burden imposed when their foreign income is taxed by both the United States and the foreign country where their income originated. Usually, if the foreign tax rate is higher than the U.S. tax rate, there will be no resulting U.S. tax on this foreign income. If the foreign tax rate is lower than the U.S. tax rate, the U.S. tax on the foreign income will be the difference between the two tax rates. Keep in mind that the foreign tax credit reduces U.S. taxes on foreign source income, but never reduces U.S. taxes on U.S. source income.