Paying taxes twice on the same income \u2014 once to the U.S. and once to your current country of residence \u2014 is a common concern for U.S. citizens working abroad. Fortunately, the U.S. has a safeguards like the Foreign Tax Credit in place to help ensure citizens aren\u2019t double taxed on the same income. At the end of the day, your U.S. income tax liability depends on your ability to utilize these safeguards. <\/p>\n\n\n\n
Not everyone can claim the Foreign Tax Credit, and there are pros and cons of choosing the Foreign Tax Credit over the Foreign Earned Income Exclusion<\/a>. Learn the basics below, and if you’re ready to file Form 1116<\/a> for the Foreign Tax Credit, head on over to our Ways to File<\/a> page to get started.<\/p>\n\n\n\n The Foreign Tax Credit (FTC) is one method U.S. expats can use to offset foreign taxes paid abroad dollar-for-dollar. Tax credits in general work like this: If you owe the U.S. government $1,500 in taxes and you have a $500 tax credit, you\u2019ll end up only owing $1,000 \u2014 and the Foreign Tax Credit is no different. If you\u2019ve already paid income taxes to a foreign country, the FTC gives you a credit to use on your U.S. taxes, lowering your U.S. tax liability. The maximum credit amount you\u2019re allowed to claim depends on your worldwide income and how much in taxes you\u2019ve already paid. We\u2019ll run through some examples further down.<\/p>\n\n\n\n Who is eligible for the foreign tax credit? <\/strong> In general, you\u2019re eligible for the credit if you\u2019re a U.S. citizen or resident who earns foreign income abroad and already paid income taxes to your country of residence.<\/p>\n\n\n\n Often expats will owe no U.S. tax if working in a country with a higher tax rate than the U.S., like China, but the rules are complex depending on the country where you live and the foreign tax credit limitations. That\u2019s why it\u2019s crucial to make sure to check with your expat tax advisor about which foreign taxes you can use to maximize your FTC.<\/p>\n\n\n\n There are a few foreign tax credit limitations for U.S. expats \u2014 you can\u2019t just claim it on any income earned abroad. To get your maximum credit amount and income limit you\u2019ll divide your foreign-sourced taxable income amount by your total taxable income, then multiply that result by your U.S. tax liability. <\/p>\n\n\n\n There are four stipulations to be able to claim the credit:<\/p>\n\n\n\n If paying taxes to your resident country isn\u2019t mandatory, you won\u2019t qualify for the FTC. The tax must<\/em><\/strong> be imposed on you\u2014for example, if you live in Australia and Australian taxes are automatically<\/em><\/strong> deducted from your paycheck, that is considered to be an income tax imposed on you.<\/p>\n\n\n\n You must have already paid or accrued the foreign tax. If you haven\u2019t paid it, accrued it, or are not responsible for paying it, you won\u2019t qualify.<\/p>\n\n\n\n This is pretty self-explanatory. If you pay taxes to a foreign country, in order to use the FTC the tax must be a legal tax and you must be required to pay the tax. If, for example, you\u2019re a digital nomad that has no current country of residence and thus no imposed income taxes, you wouldn\u2019t be able to claim the FTC.<\/p>\n\n\n\n In order to claim the FTC, you must have paid income taxes to a foreign country. The IRS states the following types of foreign taxes are not eligible for the FTC:<\/p>\n\n\n\n Be careful \u2014 the IRS has stipulations on what counts as a foreign “income” tax.<\/strong> For example, up until recently, foreign tax credit rules stated Americans living in France<\/a> couldn\u2019t claim a tax credit on French Generalized Social Contribution Taxes. Why? Because the IRS didn\u2019t consider them income taxes. The IRS has since changed its stance<\/a> and now U.S. expats in France may claim the FTC to offset these French taxes. Another example is the solidarity tax that supplements income taxes in Germany<\/a>.<\/p>\n\n\n\n Some expats live in countries that do not have an income tax, like the UAE,<\/strong> but have other forms of taxes. If you paid foreign taxes in lieu of income taxes, you still may be able to offset them with the FTC. Taxes that qualify must be a foreign levy imposed in place of an income tax. Each scenario in each country is different, so we recommend you leave the Foreign Tax Credit limitations and rules to the experts.<\/p>\n\n\n\n One nice thing about claiming the FTC is the foreign tax credit carryover. In summary, if you don\u2019t use the full tax credit amount you\u2019re allowed, your unused amount can carry over to the next tax year or carry back to the previous year. If you were short on credits in the previous year, your leftover amount must be carried back<\/strong>. To get your maximum credit amount you\u2019ll divide your foreign-sourced taxable income amount by your total taxable income, then multiply that result by your U.S. tax liability.<\/p>\n\n\n\n Here are two examples:<\/strong><\/p>\n\n\n\n Let\u2019s say you\u2019re a U.S. citizen who moved to Germany for a teaching job. You have a salary of $60,000 and paid $26,400 in taxes to the German government. You also have $10,000 in U.S. trust income. At the end of the year, you have a U.S. tax liability of $16,000.<\/p>\n\n\n\n To calculate your allowable foreign tax credit amount, you\u2019d take:<\/p>\n\n\n\n $60,000 (Foreign sourced taxable income) You\u2019d then take that .86 and multiply it by your U.S. tax liability ($16,000) = $13,760<\/strong>. You could receive up to $13,760 as an FTC. The difference between $26,400 (German taxes paid) and $13,760 is your Foreign Tax Credit carryover amount, and you can carry that over for up to 10 years. So, in this case, you\u2019d have a carryover credit of $12,640.<\/p>\n\n\n\n Now, say you\u2019ve left Germany, and have a teaching job in the UAE, which has no income tax.<\/strong> You earn the same income of $60,000, and you still get $10,000 in trust income from the U.S. At the end of the year, you owe the U.S. government $16,000 in taxes, which you can offset with your carryover amount of $12,640. After applying your rollover amount, you\u2019d only end up owing $3,360 in U.S. taxes.<\/p>\n\n\n\n Not fond of heavy math? Simply file with an Expat Tax Advisor<\/a> and let them do the hard work for you.<\/strong><\/p>\n\n\n\n The FTC isn\u2019t your only tool to offset U.S. taxes. The Foreign Earned Income Exclusion<\/a> (FEIE) lets you deduct foreign income from your yearly tax filing like any other deduction, while the FTC lets you claim a dollar-for-dollar tax credit to reimburse you for taxes already paid to your host country.<\/p>\n\n\n\n Many expats ask us which is better, using the tax credit or the foreign income exclusion. The pros and cons of the Foreign Tax Credit depends on your specific situation, your assets, and where you\u2019re now living.<\/p>\n\n\n\n A big difference between the two is what counts as income.<\/strong><\/p>\n\n\n\n The FEIE only applies to income from your wages. The FTC applies to gross income from all sources, including passive income like interest or dividends. However, it only works if you pay taxes to the country you now reside in.<\/p>\n\n\n\n Different situations have different stipulations and consequences, which is why our Tax Advisors always do a thorough analysis to find out which form would benefit you the most. If you\u2019re unsure which form to use, we strongly recommend you leave it to the professionals (like us!).<\/p>\n\n\n\n These are some of the factors our Tax Advisors consider when choosing between the FTC and the FEIE:<\/strong><\/p>\n\n\n\n Have more questions about foreign tax credit limitations or rules? Ready to file Form 1116<\/a>? Whether you file expat taxes yourself<\/a> with our online DIY expat tax service designed specifically for U.S. citizens abroad or file with an advisor<\/a>, H&R Block is here to help.<\/p>\n","protected":false},"excerpt":{"rendered":" The Foreign Tax Credit is one of two safeguards U.S. expats can use to avoid paying paying taxes twice on the same income. Learn who can claim it and how with the experts at H&R Block.<\/p>\n","protected":false},"author":3,"featured_media":143,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[34],"tags":[],"class_list":["post-142","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-credits"],"acf":[],"yoast_head":"What is the Foreign Tax Credit?<\/h2>\n\n\n\n
Who can claim the Foreign Tax Credit?<\/h2>\n\n\n\n
Foreign Tax Credit income limits & rules for U.S. citizens abroad<\/h2>\n\n\n\n
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The tax must be imposed on you<\/h3>\n\n\n\n
You must have paid or accrued the foreign tax<\/h3>\n\n\n\n
The tax must be the legal and actual foreign tax liability<\/h3>\n\n\n\n
The tax must be an income tax<\/h3>\n\n\n\n
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Foreign Tax Credit Carryover<\/h2>\n\n\n\n
For example, if you have a $500 carryover amount and in the previous year you were short $600 in credits on foreign income, you must carryback that $500 to that previous year instead of carrying it forward. If you are allowed to carry it over, your tax credit carryover can be carried over for up to 10 years.<\/p>\n\n\n\nCalculating your Foreign Tax Credit and carryover amount<\/h3>\n\n\n\n
Divided by
$70,000 (your total taxable income)
= .86<\/p>\n\n\n\nThe Foreign Tax Credit vs. the Foreign Earned Income Exclusion: Pros and Cons<\/h3>\n\n\n\n
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Confused about filing Foreign Tax Credit Form 1116? Trust H&R Block to handle your expat tax filing for you.<\/h2>\n\n\n\n