Due to the continuous extension and amplification of the global market, there is instant creation of many avenues for all those investors who seek opportunities abroad or rather outside the borders of America. The US government will determine and calculate taxes on all income that is earned from all the foreign sources. This clearly implies that all those domestic taxpayers who have direct holdings in the different foreign investments should pay tax to Uncle Sam and also to the country where their investment assets are located. The foreign tax credit is offered for all those who earn income from any foreign sources and you may claim foreign tax credit for all the taxes that you pay in a foreign country. If you’re someone who is involved in such foreign investments, you may not know the details on foreign tax credit. Read on the concerns of this article to know more on this subject.
What is the general rule?
You might claim a tax credit for the taxes that you pay to any foreign country. In order to claim the tax benefit, you need not live or work in that country. For instance, you will be allowed to claim the deduction or credit if any kind of foreign taxes were paid from a mutual fund on your behalf. Unlike the income exclusions, there are no time requirements in this case. You can claim either the tax credit or the deduction but you can’t claim both for the foreign taxes that you paid.
Foreign tax deduction and tax credit
For foreign taxes, you may claim an itemized deduction and this usually provides the least tax benefit. However, if you don’t claim the foreign tax credit, deducting foreign taxes will be the only remaining alternative. Through a foreign tax credit, your US tax liability on a dollar-for-dollar basis gets reduced and therefore is more valuable than any kind of deduction that reduces your taxable income.
What is the maximum allowable foreign tax credit?
Yes, there is certainly a limit to the foreign tax credit and it can’t surpass your US tax liability multiplied by a certain percentage. This percentage is nothing but your total foreign source income divided by the total worldwide income. You should also determine the total allowable amount by different categories of income and example of income categories might include wages and income.
Can you carry back or carry over your foreign tax credit?
Any foreign tax credit amount that has surpassed the maximum limit can be carried back to a previous tax year or you can also carry it forward to a future tax year. This is a huge benefit as you can carry back the foreign tax credit to the immediately last year and also carry it forward to the next 10 tax years. If you have paid foreign taxes in 2004 or the last year, there is a different carry over time that is applicable. For the tax years 2004 and earlier, any excess foreign tax credit can be carried back to the 2 previous tax years or can also be carried away for the next 5 tax years. This change in the carryover time frame was a portion of the American Jobs Creation Act of 2004.
So, if you’re someone who is eager to claim foreign tax credit, you should consult with a tax advisor and get to know the details of the entire process. As this is a legal process, you would require getting professional help and in order to avoid any kind of mistakes, it is always better to get help rather take amateurish decisions.
