The United States taxes its residents on a worldwide basis. This means that the U.S resident’s income is tax even though it is earned in another country. For that reason, taxpayers are permitted to claim a credit for foreign taxes paid on foreign income. If you work in a country other than the one where you live, and if both countries impose income taxes on earned income, then you should be familiar with the concept of a “foreign tax credit”. Foreign tax credit is a tax break available to most U.S taxpayers.
The U.S and major countries of the world are part of the tax treaties that prevent citizens and businesses that work in multiple countries from being subject to double taxation in both the home and host country. No country provides an unlimited foreign tax credit. For instance, the U.S. tax code provides for a tax credit for taxes paid to other countries but only up to the amount of taxes that would have been paid to the U.S
My preference for the topic “foreign tax credit” is mainly because my father is employed in Mexico. Therefore, when my parents first filed their income tax return, the tax preparer didn’t inform them of the “foreign tax credit” available. This year my parents were able to take advantage of the credit and avoid the double taxation from both countries.
The U.S. foreign tax credit is not limited to taxes on earned income. Investment income, real estate gains and capital gains are also subject to taxation in various foreign countries. The 1997 tax law introduced a provision for those with a minimum amount of foreign taxes. Sometimes, a U.S. mutual fund with foreign investments will pay taxes to foreign countries and those taxes are passed through to the shareholder so that you can claim a foreign tax credit. The problem is that a small amount of foreign tax credit can increase your tax preparation fees by more than the total tax credit because of the long and complex for
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