Foreign Tax Credits (FTC)

  1. What is a Tax Credit?

A tax credit provides a dollar for dollar reduction of current income tax liability.  For example, a tax credit of $100 will reduce your tax liability by $100.  In contrast, a tax deduction lowers the amount of income that is taxable, and the benefit would be measured by the individual’s marginal income tax bracket.  For example, an individual in the 25% marginal tax bracket receives a tax deduction of $100, the overall tax savings is $25.  Generally, a tax credit is more beneficial for tax purposes than a tax deduction.

  1. What is the Foreign Tax Credit?

Double taxation on foreign income is a problem for US citizens living abroad when they file their US income tax return each year.  A US citizen who paid or accrued taxes to a foreign country on foreign sourced income and is subject to US tax on the same income, may be able receive a tax credit, known as the foreign tax credit, for the taxes paid to the foreign country.

  1. What are the requirements to claim the Foreign Tax Credit?

The following tests must be met for any foreign tax to qualify for the foreign tax credit on a US citizen’s income tax return:

  • The tax must be imposed on the US citizen;

  • The US citizen must have paid or accrued the tax;

  • The tax must be the legal and actual foreign tax liability; and

  • The tax must be an income tax.