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Understanding the Foreign Tax Credit

The Foreign Tax Credit (FTC) is a non-refundable tax credit available to U.S. taxpayers who have paid or accrued foreign income taxes to a foreign government. The FTC is intended to mitigate the double taxation that can occur when foreign-source income is taxed by both the United States and the foreign country from which the income is derived.

Eligibility for the Foreign Tax Credit

• The foreign tax must be imposed on you as an individual or business entity.
• The tax must be a legal and actual foreign tax liability.
• The tax must be an income tax (or a tax in lieu of an income tax).

How to Use the Foreign Tax Credit

To claim the FTC, you must file Form 1116, "Foreign Tax Credit," unless you meet certain criteria that allow you to claim the credit directly on your Form 1040. The credit is generally limited to the amount of U.S. tax attributable to foreign-source income. It is important to keep accurate records and documentation to support the foreign taxes paid or accrued.

Claiming the Foreign Tax Credit through TurboTax

1. Log in to your TurboTax account and select the current year's tax return.
2. Navigate to the "Federal Taxes" tab and then to the "Deductions & Credits" section.
3. Scroll down to the "Estimates and Other Taxes Paid" section.
4. Choose "Foreign Taxes" from the list of options.
5. Follow the on-screen prompts to enter information about the foreign taxes paid. TurboTax will guide you through the process of completing Form 1116 if required.
6. Review the information entered to ensure accuracy and completeness.
7. Proceed with the rest of your tax return, and TurboTax will calculate your FTC and apply it to your total tax liability.

Important Considerations

• The FTC cannot exceed the amount of U.S. tax on the same income.
• You cannot claim a credit for taxes paid on income that is excluded under the Foreign Earned Income Exclusion.
• Carryback and carryover provisions may apply if the credit exceeds the tax liability.
• Special rules and limitations apply to passive income, such as dividends and interest, and to income derived from certain specific sources.

Professional Assistance

While tools like TurboTax can simplify the process of claiming the Foreign Tax Credit, the rules governing the FTC can be complex. If you have substantial foreign income or taxes, or if you are unsure about your eligibility or how to properly claim the credit, it is advisable to seek the assistance of a Certified Public Accountant (CPA) or a tax professional who specializes in international taxation.