The Foreign Tax Credit is a tax credit that US taxpayers can use to lessen their tax burden on foreign-sourced income. This credit is non-refundable and is intended to prevent double taxation that would otherwise occur when the same income is taxed by both the US government and the foreign country from which it was earned or received.
Here's how it works:
- You must have foreign-source income, such as wages from a job in a foreign country, interest from a foreign bank account, or dividends from a foreign corporation.
- You must have paid or accrued taxes on that income to a foreign government.
- You can claim the credit on your U.S. income tax return using Form 1116. The credit is limited to the amount of U.S. tax attributable to your foreign-source income.
- The credit cannot be used to offset U.S. tax on U.S.-source income. It also cannot be used to offset taxes paid to a foreign country on income that is excluded from U.S. tax under the foreign earned income exclusion or the foreign housing exclusion.
If you're interested in learning more about Foreign Tax Credits, you can find additional information here: The Foreign Tax Credit: What Expats Need to Know
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