U.S. Citizens Overseas
Question: I am a U.S. citizen living and working overseas. Can I claim a tax credit on my U.S. tax return for the taxes I pay to the foreign country?
Answer:
Generally, the U.S. tax system allows individuals a way to limit the effects of double taxation. Double taxation occurs when the same income is taxed in two different countries. Within certain limits, this may be done by claiming a credit or a deduction for the foreign taxes on your U.S. tax return. (Alternatively, U.S. citizens may elect to eliminate double taxation by excluding certain foreign earned income from their U.S. taxable income.)
- You can choose each tax year to take the amount of a qualified tax paid or accrued during the year as a foreign tax credit or as an itemized deduction.
- The foreign tax credit is intended to relieve U.S. taxpayers of the double tax burden when their foreign source income is taxed by both the United States and the foreign country from which the income is derived.
- Only income taxes paid or accrued to a foreign country or a U.S. possession qualify for the foreign tax credit.
- You can choose to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction.
- To choose the foreign tax credit you must generally complete Form 1116 (PDF), Foreign Tax Credit, and attach it to your Form 1040 (PDF).
- You may claim the foreign tax credit without attaching Form 1116 if all of your foreign source income is interest or dividends reported to you on qualified payee statements, and the total amount of qualifying foreign taxes you paid or accrued is not more than $300 ($600 in the case of a joint return) and is paid to countries recognized by the United States.
- To choose the deduction, you must itemize deductions on Schedule A (Form 1040) (PDF).
- You may not take either a credit or a deduction for taxes paid or accrued on income you exclude under the foreign earned income exclusion or the foreign housing exclusion. There is no double taxation in this situation because the income is not subject to U.S. tax.
Additional Information:
- Publication 514, Foreign Tax Credit for Individuals
- Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad
- Tax Topic 856, Foreign Tax Credit
Category: U.S. Aliens and Citizens Living Abroad
Subcategory: U.S. Citizens Overseas
