US expats are always looking for ways to reduce their US expat tax liability and the Foreign Tax Credit is one of those ways. But what exactly is it and how can it help you? David McKeegan of Greenback Expat Tax Services explains.
Hi everybody. I’m David McKeegan with Greenback Expat Tax Services and our question this week is, “What is the Foreign Tax Credit?” The Foreign Tax Credit is a dollar-for-dollar tax credit that you can use to offset taxes paid to a foreign government on your US tax return. It’s one of the key things you can do to help limiting double taxation on your US expat tax return. In order to take this credit, you need to meet four criteria. The first one, the tax must be assessed on income. Things like dividends or rental income, that’s not going to count. It has to be earned income. You must have a tax liability that has been paid or incurred, the tax must be imposed on you as an individual, and the tax must have originated legally from a foreign country. If the tax is from Iran or North Korea, it’s not going to count.
There are a couple of limits to the Foreign Tax Credit. Again, this is mainly for earned income, so dividends, foreign gas extraction income, those will not qualify. The income has to be reported in US dollars, so if you earned the income in euros or pounds, you’ll have to convert it to US dollars. You cannot exceed the amount of US expat taxes that you paid on the foreign-sourced income, so the credit can’t be higher than the taxes paid. Basically, you can’t use the Foreign Tax Credit and the Foreign Earned Income Exclusion on the same income. So you can’t take both of them on the same income. One of the nice things Foreign Tax Credit is you can build this tax credit up and you can carry it either forward or backwards depending on your tax situation. This can help you years down the line.
If you have any questions about the Foreign Tax Credit, please feel free to get in touch with us, and we’ll be more than happy to answer any questions you have. Thank you very much.
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