Foreign taxes: what to do?
Taking a cue from the last blog of foreign disclosures, this blog is about a person who owns foreign assets, and/or a foreign investment account. Of course they pay federal taxes on the income stream from these foreign assets and/or foreign accounts (remember a US citizen/resident alien is taxed on his/her worldwide income), but ends up paying foreign taxes as well on the income stream on these foreign assets and/or foreign accounts. What can be done with these paid foreign taxes?
Fortunately, the federal tax code does allow a tax credit on foreign taxes paid against any federal income tax liability. It is a non-refundable tax credit, meaning that if your federal income tax liability is already at zero, before claiming this tax credit, the foreign tax credit cannot be claimed, and thusly a refund will not result on the excess of the foreign tax credit. However, the federal tax code does allow that any excess on the foreign tax credit can be carried back one year prior, and then carried forward into subsequent years, for up to ten years. So, all is not lost!
The foreign tax credit is calculated based on both the type of source of income (e.g. passive investment income, active business income, etc.), as well as the amount of foreign tax paid (translated into US dollars, of course). The forging tax is allocated against each type of source of income, to determine the actual amount of the foreign tax credit. This is a very complex formula, which can cause some tax practitioners to lose some hair over it.
Basically, the foreign tax credit does serve a purpose so that a person does not pay income taxes twice on the same source of foreign income from a foreign asset, and/or a foreign investment account.
If you do have major foreign assets and/or major foreign investment accounts that you disclosed, but realized that you paid foreign taxes on the income stream from these foreign assets, and/or foreign investments, please contact us a firstname.lastname@example.org, and we will help you to determine the amount of the foreign tax credit that you are entitled to against your federal income tax liability. We are always here to help.