FOREIGN TAX CREDIT AND DEDUCTION

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Foreign Tax Credit and Deduction.

 

You can choose each tax year to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction. You can change your choice for each year's taxes.

To choose the foreign tax credit, you generally must complete Form 1116, Foreign Tax Credit and attach it to your U.S. tax return. To choose to claim the taxes as an itemized deduction, use Schedule A (Form 1040), Itemized Deductions.

As a general rule, you must choose to take either a credit or a deduction for all qualified foreign taxes.

If you choose to take a credit for qualified foreign taxes, you must take the credit for all of them. You cannot deduct any of them. Conversely, if you choose to deduct qualified foreign taxes, you must deduct all of them. You cannot take a credit for any of them.

The foreign tax credit intends to reduce the double tax burden that would otherwise arise when foreign source income is taxed by both the United States and the foreign country from which the income is derived.

The tax must meet four tests to qualify for the credit:

  • The tax must be a legal and actual foreign tax liability

  • The tax must be imposed on you

  • You must have paid or accrued the tax, and

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

 

Generally, only income taxes paid or accrued to a foreign country or a U.S. possession (also referred to as a U.S. territory), or taxes paid or accrued to a foreign country or U.S. possession in lieu of an income tax, will qualify for the foreign tax credit.