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Archive for Foreign Tax Credits

Guidance Related To The Foreign Tax Credit, Including Guidance Implementing Changes Made By The Tax Cuts And Jobs Act

IRS - Foreign Tax Credit Guidance

Background

The Act made several significant changes to the Internal Revenue Code with respect to the foreign tax credit rules and related rules for allocating and apportioning expenses for purposes of determining the foreign tax credit limitation. In particular, the Act repealed the fair market value method of asset valuation for purposes of allocating and apportioning interest expense under section 864(e)(2), added section 904(b)(4), added two foreign tax credit limitation categories in section 904(d), amended section 960(a) through (c), added section 960(d) through (f), and repealed section 902 along with making other conforming changes. The Act also added section 951A, which requires a United States shareholder of a controlled foreign corporation (“CFC”) to include certain amounts in income (a “global intangible low-taxed income inclusion” or “GILTI inclusion”).

This document contains proposed regulations (the “proposed regulations”) addressing (1) the allocation and apportionment of deductions under sections 861 through 865 and adjustments to the foreign tax credit limitation under section 904(b)(4); (2) transition rules for overall foreign loss, separate limitation loss, and overall domestic loss accounts under section 904(f) and (g), and for the carryover and carryback of unused foreign taxes under section 904(c); (3) the addition of separate categories under section 904(d) and other necessary updates to the regulations under section 904 including revisions to the look-through rules and other updates to reflect pre-Act statutory amendments; (4) the calculation of the exception from subpart F income for high-taxed income under section 954(b)(4); (5) the determination of deemed paid credits under section 960 and the gross up under section 78; and (6) the application of the election under section 965(n).

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Form 1116: What Is The Catch?

Virtual Tax Advisor

Although Form 1116 is a great benefit, there are some limitations to this tax credit that you should be aware of.

  1. The money earned needs to be subject to income tax in the foreign country. Unfortunately, you cannot use the credit to offset the cost of the property or other taxes paid abroad. Income only!
  2. The credit can be up to the amount you paid the foreign country. However, it is limited to no more than the percentage of your income that was earned overseas. So if you only earned 40% of your income in a foreign country that was subject to taxation abroad, then you cannot take a deduction equal to more than 40% of your U.S. tax burden.
Look At Expat Example Using Foreign Tax Credit

Mark and Sylvia have been living and working in Spain for three years. They are full-time residents and earn all of their foreign earned income through the Spanish companies they work for (perhaps, you can relate to this example of how to claim the Foreign Tax Credit):

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Foreign Tax Credit For Individuals Living Abroad

As you know, the United States requires all citizens and permanent residents (Green Card holders) to report income via annual income tax filings regardless of where in the world the money was earned. As the name suggests, the Foreign Tax Credit for individuals is designed to reduce your U.S. tax burden on income that was earned and consequently taxed in a foreign country. In this way, you will not be subject to double taxation on that money.

In addition to foreign earned income (FEI), dividends, interest, and even rental income that come from foreign sources are eligible for consideration with the Foreign Tax Credit if they were taxed by a foreign entity. One benefit to using this credit is that it is available to all U.S. taxpayers who have foreign earned income or investment income from a foreign source. There are no stipulations regarding residency or time spent in a foreign country to take advantage of this reduction in taxes owed at home. Read more

Expat Guide To Foreign Tax Credit Carryover

As an expat, no matter where you live and work, your US and foreign income is subject to IRS taxes. The fact that the majority of countries around the world also require you to file and pay tax locally makes the matter even more complex. In order to avoid double taxation, the US allows you to take a Foreign Tax Credit based on the foreign taxes you pay to your resident country. The Foreign Tax Credit is subtracted directly from your US income tax. However, if you cannot claim the full credit amount, you are allowed a carryover. Carryovers do expire, though, so read on to find out how best to utilize this savings! Read more

A Quick Refresher On The Foreign Tax Credit

Ephraim Moss, foreign tax credits, expat, tax professional

One of the fundamentally important tax concepts for U.S. expats to know is that the U.S. tax system has built-in mechanisms for preventing the “double taxation” of your income (i.e., tax in both your new host country and in the United States). These mechanisms provide a measure of relief for U.S. expats who remain subject to U.S. taxation, despite living and working abroad.

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Reporting A “Treaty-Based Position”—Internal Revenue Code S. 6114 Using Form 8833

John Richardson

The United States has many tax treaties with many nations. As a general principle the “savings clause” prevents Americans abroad from having the benefit of treaty provisions. That said, there are situations where a U.S. citizen abroad can benefit from the specific provisions of a specific treaty.

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Foreign Tax Credit (FTC): A Drill Down Into IRS Form 1116

John Dundon Enrolled Agent

With all the political rhetoric about borders and boundaries circulating these days by “news media” outlets, the fact of the matter is US Taxpayers are increasingly working and living abroad everyday.

With that trend comes the fact that taxpayers and tax practitioners alike find it difficult navigating the shoals of Foreign Earned Income Exclusions (FEIE) reported on Form 2555 and Foreign Tax Credits (FTC) reported on Form 1116 causing all sorts of brain damage along the way.

Today’s post dives into Foreign Tax Credit (FTC).

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FEIE—Drill Down Into IRS Form 2555

John Dundon

We get all sorts of fascinating questions from established US taxpayers in addition to those experiencing internationalism for the first time. It seems, regardless of the degree of sophistication in US income tax filing obligations, most people are out to lunch when it comes to arcane acronyms and filing requirements.

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Foreign Mutual Funds: The Horror Story

Mutual funds are defined as “an investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments, and similar assets.”

The logic behind investing in mutual funds is that, instead of placing money directly into the Stock Market and losing due to incorrect speculation, the investment is handled by efficient fund managers. Risks are lowered due to the diversification of the portfolio according to an individual’s risk tolerance. That’s what mutual funds are for those who didn’t know.

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Expat Tax Tips For The Foreign Earned Income Exclusion

Ephraim Moss

One of the most common tax relief measures available to U.S. expats is the Foreign Earned Income Exclusion (FEIE). If you qualify, you may be able to exclude all or part of your foreign salary/wages from your income when filing your U.S. federal tax return. Here are five key tips to keep in mind regarding the exclusion:

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