tax tips for tax year 2008
Foreign Tax Credit
If you paid or accrued foreign income taxes on income which is not eligible to be, or cannot fully be, excluded on Form 2555 or Form 2555-EZ, you generally may choose to claim such taxes as a credit against your U.S. income tax using Form 1116 or to deduct them from your adjusted gross income as an itemized deduction on Schedule A. Foreign taxes taken as a credit on Form 1116, reduce your U.S. tax liability. Foreign taxes taken as a deduction on Schedule A, reduce your U.S. taxable income.
Note that if you use Form 2555 and your foreign earned income exceeds the maximum allowed exclusion (earned income and housing exclusion, if applicable), the amount of foreign income tax allocable to the excluded income is not eligible for credit and must be factored out on line 12 of Form 1116. In other words, you cannot get a double benefit – both an exclusion and a foreign tax credit – on the same income.
If your only foreign source income is passive (interest, dividends, etc.) and is reported on a statement, such as a 1099, issued by a U.S. financial institution, you may be able to claim a foreign tax credit of up to $300 ($600 if married filing jointly) directly on Form 1040 without using Form 1116.