Glossary
Foreign Tax Credit (FTC)
Definition
The foreign tax credit lets a U.S. taxpayer reduce U.S. income tax by certain income taxes paid or accrued to a foreign country. It is meant to limit double taxation on the same income.
How it works
A U.S. citizen or resident who pays qualifying foreign income tax may claim a credit against U.S. tax, generally on Form 1116. The credit is a dollar-for-dollar reduction of U.S. tax, usually more valuable than a deduction.
Limits
The credit is limited to the U.S. tax attributable to the foreign-source income in each category, so it cannot reduce U.S. tax on U.S. income. Not every foreign levy qualifies; it generally has to be an income tax, legally owed and actually paid.
Carryovers and alternatives
Unused credits can generally be carried back one year or forward ten years, subject to the rules. Some taxpayers may instead use the foreign earned income exclusion, and the two choices interact, so they should be compared.
Practical example
For example, suppose Elena, a U.S. citizen working in Germany, pays income tax to Germany on her salary. She may be able to claim a foreign tax credit on her U.S. return to offset the U.S. tax on the same income.
General information, not tax advice
This page provides general educational information about U.S. federal tax rules. It is not individualized tax, legal or accounting advice, and it does not create a client relationship. Results depend on each taxpayer's specific facts.
Written by Roger I. Chirino, founder of Chirino USA Accountants & Advisors P.A.
Supported by licensed CPAs, IRS Enrolled Agents (EAs), and experienced U.S. tax professionals focused on cross-border compliance and planning.
Related questions
How does the foreign tax credit work?
Can unused foreign tax credits be carried back or forward?
Does a U.S. citizen living abroad still have to file a U.S. tax return?
Do Americans living abroad pay U.S. self-employment tax?
Who qualifies for the Foreign Earned Income Exclusion?
Does a green card holder living abroad still have to file U.S. taxes?
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