Understanding the Foreign Tax Credit
Understanding the Foreign Tax Credit — and How a CPA Can Help You Save
If you earn income outside the United States, you may already know that foreign governments can tax those earnings. The challenge? You might also owe U.S. tax on the same income. To prevent this double taxation, the IRS offers the Foreign Tax Credit (FTC) — a valuable benefit that allows you to offset your U.S. tax liability with the taxes you’ve already paid to a foreign country.
How the Foreign Tax Credit Works
The FTC generally applies to income taxes paid or accrued to a foreign country. You can claim it on your U.S. tax return by filing Form 1116 (for individuals) or Form 1118 (for corporations). The credit directly reduces your U.S. tax — dollar for dollar — up to certain limits based on your total foreign and domestic income.
Why Professional Guidance Matters
While the concept seems straightforward, calculating and maximizing the FTC can be complex. Common pitfalls include:
Misclassifying income types (general, passive, etc.)
Overlooking carryback and carryforward opportunities
Errors in exchange rate conversions
Overstating or understating eligible foreign taxes
That’s where working with an experienced CPA makes a real difference. I help clients navigate the intricacies of the credit, ensure compliance with IRS requirements, and identify tax-saving opportunities that align with their broader financial goals.
The Bottom Line
If you have foreign income or investments, the Foreign Tax Credit can significantly reduce your U.S. tax bill — but only if claimed correctly. Partnering with a CPA ensures your filings are accurate, optimized, and fully compliant.
Ready to simplify your international tax situation?
Contact me today to discuss how I can help you make the most of the Foreign Tax Credit and minimize your global tax burden.
