Foreign Tax Credit

A foreign tax credit is a tax benefit that allows U.S. taxpayers to reduce their U.S. income tax liability by the amount of foreign income taxes they paid. The foreign tax credit is a dollar-for-dollar reduction in U.S. income tax liability, up to the amount of U.S. tax that would be imposed on the foreign-source income.

There are two types of foreign tax credits: the direct foreign tax credit and the indirect foreign tax credit. The direct foreign tax credit is available for taxes paid on foreign-source income directly to a foreign government. The indirect foreign tax credit is available for taxes paid on foreign-source income that are included in the U.S. tax base through a U.S. corporation's foreign subsidiary.

The foreign tax credit is an important tax benefit for U.S. taxpayers who have income from foreign sources. The foreign tax credit can help to reduce the overall tax burden on U.S. taxpayers who earn income from foreign sources.

To claim the foreign tax credit, taxpayers must file Form 1116, Foreign Tax Credit. Form 1116 requires taxpayers to provide information about the foreign taxes they paid, the foreign-source income they earned, and the U.S. tax that would be imposed on the foreign-source income.

The foreign tax credit is a valuable tax benefit for U.S. taxpayers who have income from foreign sources. The foreign tax credit can help to reduce the overall tax burden on U.S. taxpayers who earn income from foreign sources.