The foreign tax credit intends to reduce the double tax burden that would otherwise arise when foreign source income is taxed by both the United States and the foreign country from which the income is derived.
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2.
Foreign Taxes That Don't Qualify:
● Taxes refundable to you.
● Taxes used to provide a subsidy to you or someone related to you.
● Taxes not required by law, because you could have avoided paying the taxes to the
foreign country.
● Taxes that are paid or accrued to a country if the income giving rise to the tax is for a
period (the sanction period) during which:
o The Secretary of State has designated the country as one that repeatedly
provides support for acts of international terrorism,
o The United States has severed or doesn't conduct diplomatic relations with the
country, or
o The United States doesn't recognize the country's government, unless that
government is eligible to purchase defense articles or services under the Arms
Export Control Act.
● Withheld foreign taxes on dividends for foreign stocks that don't meet required
minimum holding periods.
● Withheld foreign taxes on gains and income from other foreign properties that don't
meet required minimum holding periods.
Note: These taxes may be claimed as an itemized deduction even if you claim foreign
tax credits for qualifying taxes.
Choosing a Credit or a Deduction
You can choose to take the amount of any qualified foreign taxes paid during the year
as a credit or as a deduction. To choose the deduction, you must itemize deductions
on Form 1040, Schedule A (PDF). To choose the foreign tax credit, you generally must
complete Form 1116 (PDF) and attach it to your Form 1040 (PDF) or Form
1040NR (PDF). You must choose either the foreign tax credit or itemized deduction for
all foreign taxes paid or accrued during the year. This is an annual choice.
If you're a cash basis taxpayer, you can only take the foreign tax credit in the year you
pay the qualified foreign tax unless you elect to claim the foreign tax credit in the year
the taxes are accrued. Once you make this election, you can't switch back to claiming
the taxes in the year paid in later years.
Foreign Earned Income and Housing Exclusions
You may not take either a credit or a deduction for taxes paid or accrued on income you
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