U.S. taxpayers are generally taxed on their worldwide income.  But what happens when that income is also taxed by another country?  The Internal Revenue Code’s primary mechanism to alleviate this double taxation of income is the foreign tax credit.  The foreign tax credit provides U.S. taxpayers who owe taxes to a foreign country with a credit against their U.S. tax equal to the amount of qualifying foreign taxes paid or accrued.

Generally, U.S. taxpayers are entitled to a credit for income, war profits, and excess profits taxes paid or accrued during a tax year to any foreign country or U.S. possession, or any political subdivision of the country or possession. U.S. taxpayers living in certain treaty countries may be able to take an additional foreign tax credit for the foreign tax imposed on certain items of income.  In addition, note that taxpayers making an election under section 962—to be taxed at corporate rates on certain income from a controlled foreign corporation (CFC)—are required to include that income in gross income under sections 951(a) and 951A(a) and may be entitled to claim the credit based on their share of foreign taxes paid or accrued by the CFC.

Foreign Tax Credit Basics

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