What is the Foreign Tax Credit and How Does Foreign Tax Credit Work?

What is the Foreign Tax Credit and How Does Foreign Tax Credit Work?
Share on facebook
Facebook
Share on google
Google+
Share on twitter
Twitter
Share on linkedin
LinkedIn
Reading Time: 3 minutes

Understanding the Basics

If you read about taxation processes, you will be welcomed by heavy jargon from everywhere. Nobody understands your situation more than we do! We have been dealing and fighting with this jargon for ages and pledged to make sure nobody else goes through the same problem.

Let’s break this heavy term (Foreign Tax Credit) into basic understandings. Imagine that you decided to move to Canada on some busy day in the U.S. and wanted to get a teaching job there. Everything is perfect here. You moved out, got the job, and started to teach your outstanding students.

Months passed, and you were getting a decent salary as well. The Canadian government made sure to get its share as well. They started to deduct taxes from your income.

After some time, you decided to get back to the U.S. Once you moved inside your country (the U.S.), it asked you to declare all the income you earned in the foreign country.

Following the legalities, you declared the income, and suddenly you got to know that all the income you earned in a foreign country is taxable. Taking dollars out of your pocket, which resulted from intense hard work, is very frustrating.

You immediately decided to consult a cross-border tax expert, and he/she told you that the income tax you paid in a foreign country was counted under Foreign Credit. Moreover, by using foreign credit, you can lower your taxes in the U.S.

To conclude, FTC (Foreign Tax Credit) is a credit you can use to take off U.S. taxes. This is mainly obtained from the income tax you pay in a foreign country.

Foreign Tax Credit has its limitations and rules. You are required to fulfill its eligibility requirements as well to obtain it. We have discussed its aspects in the coming section of the article.

Are Foreign Tax Credit and Tax Deduction the Same Terms?

Both are different concepts. In the tax deduction, your taxable income gets reduced. For example, in 2021, your taxable income was $20,000. You’re given a tax deduction of $10,000. This would make your taxable income $10,000, and you are liable to pay taxes in this bracket.

Moreover, Tax Credit directly takes off the amount you pay in taxes. For example, in 2021, the U.S. government asks you to pay a $35,000 tax. In your tax credit, you hold $5,000. You will be liable to pay $30,000 of tax. Your $5,000 (Tax Credit) has been reduced from your original taxed amount ($35,000).

explaining tax credit vs tax deduction

Eligibility Requirements for FTC

The FTC does NOT apply to all your foreign country-paid taxes. In short, you follow some of the guidelines to list your foreign paid tax in the Foreign Tax Credit.

We have mentioned some of the general rules over here:

  • You are bound to pay the taxes, which have been regulated on you by the foreign country.
  • You must pay the tax to consider it as a Foreign Tax Credit.
  • It should be legal.
  • The foreign tax should be imposed on your income.
  • In a tax year, passive income should be the source of income.
  • Qualified foreign taxes have limitations. They should NOT exceed $300 (filing individually) and $600 (filing jointly).
  • The taxes you paid in a foreign country should come to you on a statement, for example, like Form 1099.

We have also given some great insights about the foreign tax credit. These guidelines can help you while filings your taxes.

Type of Foreign Tax Credit

There are two types of foreign tax credit. The first one is called Refundable, while the second is called Non-refundable.

Refundable Tax Credit implies that you can get a refund if the tax credit limit exceeds your yearly tax. For example, in 2021, you are liable to pay $4,000 in taxes to the U.S. government. Moreover, you have a refundable $5,000 foreign tax credit. In such cases, you are liable to get a refund of $1,000.

This situation is different in Non-Refundable Foreign Tax Credit. Even if your tax credit exceeds your yearly tax, you won’t get any refund in such cases.

Forms You May Need to Submit & Deadlines You Need to Know

To claim the foreign tax credit, you need the IRS Form 1116 and your tax returns.

The due date to submit the form is April 15th. However, expats are given automatic deadline extensions to June 15th.

Moreover, we have written a complete dedicated article to explain how to calculate your foreign credit tax.

Claim Your Foreign Tax Credit Today

If you feel burdened by a lot of information, we are here to help you. We, at AkifCPA, maintained years of professionalism while filing taxes and making sure that people save money with us.

Contact us now and get your taxes reported quickly.

Subscribe to Our Newsletters

Crypto Tax & Accounting Newsletter

*Email

Cross-Border Tax Newsletter

*Email
Sign up for our Newsletter
*Email
Over 100 5 Star Reviews!
AKIF CPA
5.0
Based on 107 reviews
powered by Google
Annie Phillips
Annie Phillips
12:35 10 Oct 21
Turn around time was amazing on the project I needed done. When you don’t understand all the different forms... communication is key and you will get that here. They are there to explain what and why you need it.read more
Meru Kapadia
Meru Kapadia
23:33 01 Oct 21
I usually don't write reviews much as everyone has different experiences, but definitely wanted to share the positive... experience I have had here and why I would recommend them to all my family, friends and co-workers.I got a referral for here from a friend, so thought of giving them a try over my old CPA firm. I have been going here for a couple years now and have to say they are top notch. They are always responsive and willing to work with me even when I am delayed. I generally like to ask a lot of questions and not once did I feel like they were annoyed by it and would very thoroughly and positively answer all my concerns with detail explanations. Even during the pandemic, they worked with me 100% virtual and it was seamless. Overall, I am very happy with this firm and will continue with them for the foreseeable future.read more
Kevan Shah
Kevan Shah
21:45 01 Oct 21
I’ve been going to them for 3 years now for multiple of my businesses. I changed to them after I had problems with my... previous CPA firm and I’m so glad I did! Best decision I ever made for my businesses. They have saved me thousands of dollars over the years as well as deal with my immensely complicated tax filling issues. No matter when I call, they always help answer all my questions (and trust me I have a lot) and put my mind at ease on all my concerns. I feel as if I am family the way they take care of me. The quality of their work has not changed; very consistent and professional. It is an understatement when I say I highly recommend them.read more
Maunil Shah
Maunil Shah
16:19 01 Oct 21
AKIF CPA is the best place for your tax needs! Saim has been easily available for my all my questions and concerns. ... Couldn’t ask for a better firm that provides excellent service and a familiarity with their clients. I always recommend family and friends to AKIF CPA!!read more
Shah Hussain
Shah Hussain
03:58 01 Oct 21
Hello AKIF CPA,I wanted to share my experience with you, your team and whomever may be reading this message. My most... humble thanks to you and your team for a being such great part of my success.You have done a fabulous job for us this year, and since you took over our books (during our most devastating times) you have literally taken weight off of our shoulders.Thanks for bringing everything up to date and also providing us with numbers or as you call it consultations, ahead of time so we could seal the holes.Great work!!!Shah H.read more
Sumit Dalwadi
Sumit Dalwadi
04:57 30 Sep 21
The professionals at Akif have been absolutely amazing! Quick to answer all the questions I had and always available... to offer their guidance.read more
Calvin R
Calvin R
20:21 29 Sep 21
I recommend these guys! I will be going back next year. They made everything simple and we understood what was... happening. There we issues with our taxes due to our previous accountant and these guys fixed everything. They answered our questions and service was always with a smile.read more
Ammoria Daniels
Ammoria Daniels
02:11 16 Sep 21
We contacted Akif with an urgent matter regarding corporate taxes. Akif immediately understood what was needed and... within days had everything ready to sign. The level of service we received was amazing and unmatched. Waqar expertise in trucking industry made our situation seamless. His communication was outstanding; I heard from him daily and could have been completed sooner if I was as fast as he was 😃 Highly recommended!read more
Joe Paneitz
Joe Paneitz
18:30 18 Aug 21
What an absolute pleasure to work with this CPA firm. My business is already seeing such a positive impact and growth.... I cannot believe I didn't connect with them sooner. This firm is helping in so many ways! 5 stars is an understatement! Thank you so much for your help AKIF CPAread more
Helptest ARCpoint Labs
Helptest ARCpoint Labs
15:02 18 Aug 21
The firm is quick, responsive, and has the latest technological software. Thus far, I have been with them for 3+ years... and will continue to work with them even after relocating. They make it easy even when I'm miles away. Would highly recommend them.read more
Luz Tipaz
Luz Tipaz
16:06 13 Jul 21
Saim and his team are the best CPAs in town. I have been their client for years. All started when I needed help with... company structure with multiple companies and then accounting and Taxes. I have been very happy ever since. Thank you AKIF CPA.read more
Maria perez
Maria perez
18:31 08 Jun 21
Me and my husband have been getting all of our personal Taxes, business Taxes, monthly bookkeeping, accounting and... payroll done with AKIF CPA. Recently, we had more stuff come up and had detailed analysis done on capital gains, single family rentals (SFR) and business disposition. You will only know how great this CPA company is until you have worked with them and given them a chance. Words can’t describe our experience. AKIF CPA gets the job done every time - very reliable, professional and affordable.read more
Afnaan Amin
Afnaan Amin
22:14 02 Jun 21
Very good experience, we had unique situation in regards to cross border income as Canadians currently residing in the... US. Income on both sides of the border through completely different channels. Everything was very easy and completed timely, I also had lots of random questions and Mohammad provided top notch service along the way and even after we finished our taxes!! Highly recommended.read more
Ryan Paton
Ryan Paton
10:56 08 May 21
I moved to the USA from Canada late 2018 as part of a promotion/relocation for work. For my 2019 returns, I used an... accounting firm recommended by the local Canadian social club in my city, which was a terrible experience. They were slow to respond to inquiries and would follow up in piecemeal requests which dragged out my return process over several months, often asking for information I had already provided.For the price I paid, I vowed to find better service. I found Mohammad online and decided to reach out. Mohammad was extremely responsive, took care of my US and Canadian returns as well as my wife's business returns in a timely manner. Overall, it was a very positive experience and I would recommend him to another in my situation.read more
Tuan Vo
Tuan Vo
01:59 20 Apr 21
I relocated to Texas from Alberta, Canada and needed a CPA to help me with my cross-border taxes as I was not happy... with the CPA that I used previously. During my interviewing process to find another CPA, I had good feedback from Mohammad as he was able to answer my questions regarding my unique tax situation with expertise, and importantly to me, in a timely manner. I decided to use his services for the current tax year and I have nothing but compliments for the work Mohammad provided. If you are in need of a professional cross-border CPA, I highly recommend reaching out to Mohammad Akif.read more
See All Reviews
js_loader