Foreign Tax Credit | TaxConnections

20 Jun 2023

FEIE vs. Foreign Tax Credit: Which One To Choose?

When it comes to navigating the complexities of international taxation, understanding the distinctions between the Foreign Earned Income Exclusion (FEIE) and the foreign tax credit is crucial. These two mechanisms offer expatriates different options for minimizing their tax liabilities. In this article, we aim to provide you with essential information about FEIE and the foreign tax credit, helping you make an informed decision on which approach may be more suitable for your unique circumstances. Let’s delve into the key factors you need to know when considering FEIE and the foreign tax credit.

OVERVIEW OF FEIE AND FOREIGN TAX CREDIT

US Expats earning income overseas may be responsible for paying taxes in both their country of residence and the U.S. To alleviate double taxation, two options exist: the Foreign Earned Income Exclusion and the Foreign Tax Credit. This article will offer an explanation of each option to assist in determining the appropriate choice for one’s tax circumstances.

FEIE allows qualifying individuals to exclude a certain amount of their foreign income from their U.S. taxable income. On the other hand, FTC allows individuals to claim a dollar-for-dollar credit for foreign income taxes paid on their foreign-sourced income.

This credit can be claimed on Form 1116 and applied against U.S. tax liability. Unlike FEIE, there are no restrictions on the amount of foreign income that can be used to claim FTC. However, if the foreign tax rate is lower than the U.S. tax rate, individuals might benefit more from using FEIE.
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Written by Olivier Wagner | Posted in FEIE vs. Foreign Tax Credit • Foreign Tax Credit

01 Feb 2022

Is Your Foreign Tax Credit Creditable? Think Again

As discussed in a previous article, the Foreign Tax Credit (FTC) is a bedrock of the U.S. tax system to reduce the impact of double taxation. In general terms, income that is derived from a foreign jurisdiction by a U.S. taxpayer, which is subject to an “income, war profits, and excess profits taxes paid or accrued during a tax year to any foreign country” will give rise to a tax credit for the U.S. taxpayer. I.R.C. § 901. Such credit is commonly known as the FTC.

Until the publication of the final regulations concerning the FTC last January 4, 2022, the FTC was generally predicated upon the existence of an “income tax”. Under previous regulations. (Prior Treasury Regulations or Prior. Treas. Reg.), an “income tax” was considered as such if such levy was a tax and the predominant character of the tax was that of an “income tax” in the U.S. sense. See Prior. Treas. Reg § 1.901-2(a)(1). A foreign levy was considered as having a predominant character of an income tax in the U.S. sense if the levy was designed to reach “net gain” in the normal circumstances of its calculation. See Prior. Treas. Reg § 1.901-2(b).

Whether the foreign tax was imposed upon “net gain” was dependent upon three requirements: (i) that the tax was imposed on the occurrence of the taxable event (realization test), (ii) that the tax was based on the gross receipts of the taxpayer (gross receipts test) and (iii) that the base of the tax allowed for the respective deductions associated to earning of the income, such as recovery of expenditures (net income test). See Prior. Treas. Reg § 1.901-2(b)(2), (3), (4).

Written by Fernando Juarez | Posted in Foreign Tax Credit

02 Sep 2021

Applicability Of Foreign Tax Credit Against The Net Investment Income Tax Under U.S., France, And Italy Tax Treatries

Catherine S. Toulouse v. Comm’r, 157 T.C.| August 16, 2021 | Goeke, J. | Dkt. No. 19122-19

Short Summary: The case discussed the applicability of the foreign tax credit (FTC) against the Net Investment Income Tax (NIIT) under the tax treaties between the U.S. and France and Italy. The Court concluded that under the text of such treaties, the foreign tax credit cannot be applied against the NIIT.

Catherine Toulouse (the petitioner), a U.S. citizen residing in a foreign country, filed her tax return for 2013 claiming FTC paid to France and Italy to offset her income tax. She also reported a carryover of FTCs to offset her income tax. Despite having NIIT in the amount of $11,540.00 USD, the petitioner claimed that her NIIT was zero. This calculation resulted because the petitioner added two lines to the return: the first to claim an FTC against the NIIT and the second resulting in NIIT due in the amount of zero. The petitioner disclosed her tax position by filing forms 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), and form 8275, Disclosure Statement, where she explained that under article 24(2)(a) of the U.S.-France tax treaty, and article 23(2)(a) of the U.S.-Italy tax treaty, she was allowed to apply FTC against the NIIT.

Written by Jason Freeman | Posted in Foreign Tax Credit • Freeman Law

03 Dec 2019

Treasury, IRS Issue Final Regulations On The Foreign Tax Credit

The Internal Revenue Service issued final regulations on the Foreign Tax Credit, a long-standing tax benefit that generally allows individuals and businesses to claim a credit for income taxes paid or accrued to foreign governments.

The Tax Cuts and Jobs Act (TCJA) made major changes to the tax law, including revamping the U.S. international tax system. Specifically, several Foreign Tax Credit provisions were changed, including repeal of section 902, which allowed deemed-paid credits in connection with dividend distributions based on foreign subsidiaries’ cumulative pools of earnings and foreign taxes. TCJA also added two separate limitation categories for foreign branch income and amounts includible under the Global Intangible Low-Taxed Income (GILTI) provisions.

Additionally, the TCJA changed how taxable income is calculated for purposes of the Foreign Tax Credit limitation by disregarding certain expenses and repealing the use of the fair market value method for allocating interest expense.

Written by IRS | Posted in Foreign Tax Credit • IRS Notice