Foreign Tax Credit

This credit is a non refundable tax credit that you can take if you paid or accrued foreign taxes to a foreign country on foreign income and you are subject to U.S.Tax on that same income. U.S. citizens, resident aliens, and nonresident aliens who paid foreign income tax and are subject to U.S. tax on foreign source income may be able to take a foreign tax credit. There is a limit on the credit you can claim in a tax year. This tax credit can lower your tax liability in the United States, but only up to the amount of foreign taxes paid or the U.S. tax liability on the foreign income — whichever is lower. If your qualified foreign taxes exceed the credit limit, you may be able to carry over or carry back the excess to another tax year. If you deduct qualified foreign taxes in a tax year, you cannot use a carry back or carryover in that year. As already indicated, you can claim a foreign tax credit only for foreign taxes on income, war profits, or excess profits, or taxes in lieu of those taxes. In addition, there is a limit on the amount of the credit that you can claim. You figure this limit and your credit on Form 1116. Your credit is the amount of foreign tax you paid or accrued or, if smaller, the limit. If you have foreign taxes available for credit but you cannot use them because of the limit, you may be able to carry them back 1 tax year and forward to the next 10 tax years. Also, certain tax treaties have special rules that you must consider when figuring your foreign tax credit.

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