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
  4. The tax must be an income tax (or a tax in lieu of an income tax).

Taxpayers may elect to deduct their foreign taxes on Schedule A or they may use Form 1116 to claim the foreign tax credit. When the credit is larger than a taxpayer’s U.S. tax obligation, a Form 1116 filer may “carry over” or use the leftover amount to reduce their tax bill on future returns.

Taxpayers who receive 1099 forms such as Form 1099-INT or Form 1099-DIV may have amounts reported indicating that their foreign taxes have been paid on their behalf by the issuer of the 1099. Taxpayers may elect to report foreign tax without filing Form 1116 as long as the following conditions are met:

  • All of the gross foreign source income was from interests and dividends, and all of this income and the foreign tax paid thereon were reported on Form 1099-INT, Form 1099-DIV, or Schedule K-1.
  • If a taxpayer received dividend income from shares of stock, these shares were held for at least 16 days.
  • The taxpayer is not filing Form 4563 or excluding income from sources within Puerto Rico.
  • The total of foreign taxes was not more than $300 (not more than $600 if married filing jointly).
  • All of the foreign taxes were:
    • Legally owed and not eligible for a refund, and
    • Paid to countries that are recognized by the United States and do not support terrorism.

If the foreign tax paid is more than $300 ($600 for Married Filing Jointly) or they do not meet the other conditions to make the election, taxpayers must file Form 1116.

If you live in the New York or the Tri-State area and have any questions about any possible tax deductions, call THE TAX EXPERTS at the Thorgood Law Firm For a FREE consultation, call 212-490-0704.Claiming The Foreign Tax Credit With Or Without Filing Form 1116

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