Foreign Tax Credit for Individuals
The U.S. grants a foreign tax credit against U.S. Federal income tax. This credit
is limited
to the portion of your U.S. tax considered generated by foreign
source taxable income. The credit is computed and limited separately
for the regular and alternative minimum taxes.
Foreign Income Taxes
Only foreign income
taxes qualify for the credit. Generally, a foreign
tax is an income tax if it is imposed on net income. Most
foreign individual income taxes qualify. Many foreign social
insurance taxes do not.
Foreign taxes eligible for the credit
are reduced for the portion
of income excluded under the foreign earned income exclusion. SeeForm 1116,
line 12.
Limitation
The limitation imposed each year on
foreign tax credit is
Foreign source taxable income
----------------------------------- x U.S. tax (regular or
AMT)
Worldwide taxable income
Foreign source taxable income is
foreign source income less allocated and apportioned deductions.
Foreign source gross income is reduced by the foreign earned income
exclusion. Business expenses of a self employed individual, except
interest and research expenses, are allocated and apportioned based
on gross income of the business or another factually supportable
basis. Research expenses are apportioned between U.S. and foreign
source income based on either sales or gross income, with an election
applying for five years. Interest expense as well as certain
itemized deductions are apportioned based on gross income.
Calculations relating to the foreign
tax credit can be quite complex, even for individuals, particularly
when the individual excludes income on Form
2555. Get the personal, professional help you need by calling or e-mailing Steve Fox. |
