You might qualify to claim the foreign tax credit if you paid foreign income taxes. The foreign tax credit helps relieve the burden of paying taxes twice on the same income. The credit is nonrefundable and is subject to carryover and carryback for any amounts you can't use in the current tax year.

You must meet these 4 requirements to claim the foreign tax credit:

• The tax must be imposed on you.
• You must have paid or accrued the tax.
• The tax must be the legal and actual foreign tax liability.
• The tax must be an income tax or a tax in lieu of income tax. This is a gain derived from capital, labor, or both.

Types of foreign income you might have paid foreign income taxes on include:

• Compensation for services provided in that country
• Interest paid by a payer located outside the United States
• Dividends paid by a corporation located outside the United States
• Gains on the salve of nondepreciable personal property sold while maintaining a tax home outside the United States

You can claim either a foreign tax credit or a deduction for the foreign taxes paid. Usually, the credit will give you the larger tax savings. However, certain restrictions on the credit might make the deduction the better option for you.

Some international mutual funds invest in foreign businesses and pay foreign income taxes. If you own shares in an international mutual fund, you might qualify to claim the foreign tax credit. See the Form 1099-DIV your mutual fund company sent you to find out. If the mutual fund paid foreign income taxes, your mutual fund company will report the amount paid on your 1099-DIV.

You use IRS Form 1116: Foreign Tax Credit to figure the credit. However, you can claim the credit directly on Form 1040 if you meet all of these conditions:

• Your foreign income is only from unearned income, like:
  • Interest
  • Dividends
  • Rents
  • Royalties
  • Annuities
  • Sales of non-income-producing property
  • Sales of property held for investment
• The amount of foreign income taxes you paid isn't more than $300 -- $600 if married filing jointly.
• All of your foreign income is shown on a payee statement (Ex: Form 1099-DIV or Form 1099-INT)
• You choose this procedure for the tax year.

To learn more, see IRS Publication 514: Foreign Tax Credit for Individuals.