Form 1116

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.

Testimonials

Categories