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Foreign Tax Credit

Foreign Tax Credit

Paul Wigg-Maxwell helps individuals and corporations maximize the benefit they get from credits for foreign taxes paid (the foreign tax credit).  This credit reduces the amount of U.S. tax owed. 

In general, U.S. taxpayers who paid taxes to a foreign country (a foreign tax) may be eligible to claim a credit against their U.S. income taxes required to be paid (the foreign tax credit).  A foreign tax may be required if a U.S taxpayer works outside the United States or has earnings from a foreign business activity, from an foreign asset that generated income or from a foreign investment.

Paul Wigg-Maxwell can assist you in maximizing the amount of the foreign tax credit to which you are entitled, foreign tax credit planning. He can also help with tax audits and tax appeals of the complex issues that are involved in claiming foreign tax credits.

The foreign tax credit laws are complex.  Below are some of the compliance issues: 

The foreign tax credit is based upon the amount of foreign tax paid and also on the rate at which the foreign tax is paid.  If on a dollar of foreign income earned, the amount of foreign tax paid is more than the amount of U.S. tax on that same dollar of foreign income earned, then the credit is equal to, but not greater than the amount of the U.S. tax.  A foreign tax credit limitation prevents the use of the foreign tax credit associated with that excess tax paid.  In theory there may be a situation where the excess foreign tax credit could be claimed against the U.S. tax on foreign income that is subject to a low rate of foreign tax, but in practice it is nearly impossible to find the right situation in which the excess foreign tax credit may be used.

Tracing the foreign tax paid to the foreign income on which it is paid can be difficult.  Particularly since there are rules requiring adjustment to the foreign income calculation when the U.S. tax on that type of income is subject to favorable tax treatment.  Thus, adjustment are required in calculating the amount of the foreign income which is foreign sourced when the income is treated for U.S. purposes as qualified dividends and/or capital gains (including long-term capital gains, collectible gains, unrecaptured section 1250 gains, and section 1231 gains) that are taxed in the U.S. at a reduced tax rates.

Other areas of compliance difficult are that: 1) interest expense must be apportioned between U.S. and foreign source income; 2) charitable contributions are not apportioned against foreign source income; 3) the amount of foreign tax that qualifies as foreign income tax is not necessarily the amount of tax withheld by the foreign country; 4) when a reduced rate of foreign tax applies based on an income tax treaty between the United States and a foreign country, only that reduced tax qualifies for the credit.

A different problem relating to the foreign tax credit is created if the amount of foreign tax owed is changed by the foreign tax authority ( a foreign tax redetermination).  In that situation the U.S. tax return must be amended.  Failure to notify the IRS of a foreign tax redetermination can result in a failure to notify penalty.

If you need assistance with any of these matters, contact Paul D.  Wigg-Maxwell.

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