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Q：
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Which taxes qualify for the Foreign Tax Credit?
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A：
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If a taxpayer has paid (or accrued) income taxes to a foreign country or a U.S. possession on the same foreign-source income that is also subject to U.S. income tax, the taxpayer may elect to claim those foreign income taxes as a Foreign Tax Credit (FTC) or treat them as an Itemized Deduction. Generally, the following taxes qualify for the Foreign Tax Credit:
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Income taxes paid or accrued to a foreign country or a U.S. possession.
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Taxes imposed in lieu of an income tax, such as certain withholding taxes.
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Taxes that generally do not qualify include penalties, interest, and customs duties. In addition, sales taxes and property taxes generally do not qualify for the Foreign Tax Credit, although they may be deductible if the applicable tax rules are satisfied.
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Q：
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What types of income are considered foreign-source income?
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A：
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Common examples of foreign-source income include Compensation for services performed outside the United States; Dividends paid by foreign corporations; Interest paid by foreign corporations or foreign governments; and Royalties derived from licensing intangible property for use outside the United States. For example, wages earned for services performed in France are generally considered foreign-source income, even if the wages are deposited directly into a U.S. bank account.
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Q：
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How is the Foreign Tax Credit calculated?
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A：
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Determine the amount of Qualified Foreign Taxes eligible for the credit; Calculate the Foreign Tax Credit Limitation; and the allowable Foreign Tax Credit is the lesser of the qualified foreign taxes paid (or accrued) and the Foreign Tax Credit Limitation.
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Q：
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What is the Foreign Tax Credit Limitation?
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A：
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Foreign Tax Credit Limitation = U.S. Income Tax × (Foreign-Source Taxable Income ÷ Worldwide Taxable Income).
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