International Taxpayers-Foreign Tax Credit - YouTube

WELCOME TO THE IRS'S INTERNATIONAL INDIVIDUAL

TAXPAYERS ASSISTANCE VIDEO SERIES.

DO YOU KNOW THAT IF YOU PAID TAX TO A FOREIGN COUNTRY,

YOU MAY BE ABLE TO CLAIM A FOREIGN TAX CREDIT?

LEARN THE STEPS TO DETERMINE IF YOU CAN CLAIM THE FOREIGN

TAX YOU PAID AS A CREDIT ON YOUR FEDERAL INCOME TAX RETURN.

STEP ONE: DID YOU PAY OR ACCRUE TAX TO A FOREIGN COUNTRY?

IN MOST CASES, YOU CAN CLAIM THE CREDIT ONLY IF YOU PAID OR

ACCRUED THE TAX TO A FOREIGN COUNTRY OR U.S. POSSESSION.

IN SOME CASES, YOU CAN CLAIM THE CREDIT EVEN IF YOU DID NOT

DIRECTLY PAY OR ACCRUE THE TAX YOURSELF.

FOR EXAMPLE, IF YOU FILE A JOINT INCOME TAX RETURN, YOU CAN

CLAIM THE CREDIT BASED ON THE TOTAL FOREIGN INCOME TAXES

PAID OR ACCRUED BY YOU AND YOUR SPOUSE.

REFER TO PUBLICATION 514, FOREIGN TAX CREDIT FOR INDIVIDUALS.

YOU CAN GET IT BY GOING TO IRS.GOV AND TYPING PUB 514

IN THE SEARCH BOX.

IF YOU DID NOT PAY OR ACCRUE TAX TO A FOREIGN COUNTRY,

YOU ARE NOT QUALIFIED FOR THE FOREIGN TAX CREDIT.

BUT IF YOU ANSWERED “YES”, MOVE ON TO STEP TWO.

WERE YOU THE ONE LEGALLY LIABLE FOR THE TAX?

YOU CAN CLAIM A CREDIT ONLY IF YOU HAVE THE LEGAL LIABILITY

FOR THE FOREIGN TAXES YOU PAID.

FOR EXAMPLE, A TAX THAT IS DEDUCTED FROM YOUR WAGES

QUALIFIES AS A TAX YOU WERE LEGALLY LIABLE FOR.

IF YOU ANSWERED "YES," NOW MOVE ON TO STEP THREE.

ASK YOURSELF IF IT WAS AN ACTUAL FOREIGN TAX LIABILITY.

YOU CANNOT TAKE A FOREIGN TAX CREDIT IF IT IS REASONABLY

CERTAIN YOU WILL GET THE AMOUNT BACK AS A REFUND,

CREDIT, REBATE OR OTHER PAYMENT, IF YOU MADE A CLAIM.

FOR EXAMPLE, IF YOU EARNED 100 DOLLARS OF INTEREST INCOME

FROM A FOREIGN BANK, THE BANK MAY HAVE WITHHELD 30 DOLLARS

AS FOREIGN TAX.

HOWEVER, BASED ON THE U. S. TAX TREATY WITH THE FOREIGN COUNTRY,

YOU CAN CLAIM A REFUND IN THE AMOUNT OF 20 DOLLARS

THEREFORE, YOUR ACTUAL FOREIGN TAX LIABILITY IS

10 DOLLARS, AND NOT THE 30 DOLLARS THE BANK WITHHELD.

IF YOU ANSWERED “YES”, THE TAX WAS AN ACTUAL FOREIGN TAX

LIABILITY, CONTINUE WITH STEP FOUR: WAS THE FOREIGN TAX AN

INCOME TAX OR A TAX IN LIEU OF AN INCOME TAX?

EXAMPLES INCLUDE THE FOLLOWING.

WITHHOLDING TAX ON YOUR WAGES EARNED ABROAD IS AN

INCOME TAX.

A FOREIGN TAX IMPOSED ON GROSS INCOME, GROSS RECEIPTS OR SALES,

OR THE NUMBER OF UNITS PRODUCED OR EXPORTED IS A TAX

IN LIEU OF AN INCOME TAX.

THE VALUE ADDED TAX, OR VAT, YOU PAID ON ITEMS YOU PURCHASED

IS NOT AN INCOME TAX OR A TAX IN LIEU OF AN INCOME TAX.

IF YOU ANSWERED NO TO ANY OF THE PREVIOUS FOUR QUESTIONS,

STOP, BECAUSE YOU GENERALLY CANNOT CLAIM A FOREIGN TAX CREDIT.

PLEASE REFER TO PUBLICATION 514 AND THE INSTRUCTIONS FOR

FORM 1116, FOREIGN TAX CREDIT.

BACK TO OUR SERIES OF QUESTIONS: IF YOU ANSWERED YES,

THE FOREIGN TAX WAS AN INCOME TAX OR TAX PAID IN LIEU OF AN

INCOME TAX, CONTINUE WITH THIS LAST STEP.

DID YOU CLAIM THE FOREIGN EARNED INCOME EXCLUSION OR

THE FOREIGN HOUSING EXCLUSION ON ANY PART OF THE QUALIFYING

FOREIGN INCOME?

REFER TO PUBLICATION 54, TAX GUIDE FOR US CITIZENS AND

RESIDENT ALIENS ABROAD, FOR MORE INFORMATION ON THE

FOREIGN EARNED INCOME EXCLUSION AND FOREIGN HOUSING EXCLUSION.

DID YOU ANSWER "YES" TO THE FIRST FOUR QUESTIONS?

DID YOU PAY OR ACCRUE TAX TO A FOREIGN COUNTRY?

WERE YOU LEGALLY LIABLE FOR FOREIGN TAX?

WAS IT AN ACTUAL FOREIGN TAX LIABILITY AND WAS IT INCOME

TAX OR A TAX IN LIEU OF AN INCOME TAX?

AND "NO" YOU DIDN'T CLAIM FOREIGN EARNED INCOME EXCLUSION OR FOREIGN HOUSING EXCLUSION,

THEN YOU GENERALLY CAN CLAIM THE FOREIGN TAX CREDIT.

ALTHOUGH YOU MAY QUALIFY TO CLAIM A FOREIGN TAX CREDIT,

THE AMOUNT YOU CAN CLAIM MAY BE LIMITED.

YOUR FOREIGN TAX CREDIT CANNOT BE MORE THAN THE

TOTAL U.S. TAX LIABILITY ON YOUR FOREIGN TAXABLE INCOME.

TO FIGURE IT, TAKE YOUR TAXABLE INCOME FROM SOURCES

OUTSIDE THE UNITED STATES AND DIVIDE IT BY YOUR TOTAL

TAXABLE INCOME FROM U.S. AND FOREIGN SOURCES.

THEN, MULTIPLE THAT NUMBER BY YOUR TOTAL U.S. TAX LIABILITY.

ANY AMOUNT IN EXCESS OF THE ALLOWED FOREIGN TAX CREDIT

AMOUNT CAN BE CARRIED FORWARD TO FUTURE YEARS.

CONSULT PUBLICATION 514 AND THE INSTRUCTIONS FOR

FORM 1116 FOR MORE INFORMATION.

NOW, IF YOU ANSWERED "YES" TO THE PREVIOUS QUESTIONS

AND YOU ALSO CLAIMED EITHER THE FOREIGN EARNED INCOME OR HOUSING EXCLUSION,

THEN YOU CANNOT TAKE A CREDIT ON FOREIGN TAX PAID OR

ACCRUED ON THIS EXCLUDED INCOME.

FOR MORE INFORMATION AND EXAMPLES, SEE THE SECTION

TITLED TAXES ON EXCLUDED INCOME IN PUBLICATION 514.

AND FOR ADDITIONAL INFORMATION OVERALL, GO TO IRS.GOV AND TYPE

“INTERNATIONAL TAXPAYERS” IN THE SEARCH BOX.