Foreign Tax Credit | TaxConnections

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

13 Feb 2020

GAO: Foreign Tax Credit Guidance Related To The Tax Cuts And Jobs Act, Overall Foreign Loss Recapture, And Foreign Tax Redeterminations

GAO reviewed the Internal Revenue Service’s new rule on Department of the Treasury, Internal Revenue Service: Foreign Tax Credit Guidance Related to the Tax Cuts and Jobs Act, Overall Foreign Loss Recapture, and Foreign Tax Redeterminations. GAO found the the final rule specifies the methodologies and approaches necessary to conform the existing regulations to changes specified in the Tax Cuts and Jobs Act (TCJA). IRS stated that the final rule provides guidance for taxpayers to determine the amount of their foreign tax credits (FTC) and how to compute their FTC limitation.

In addition, IRS stated that the final rule addresses how FTC carryovers are allocated across the new separate categories created by TCJA. According to IRS, the final rule also addresses certain potentially abusive borrowing arrangements and clarifies the regulatory environment by updating inoperative language in parts of the regulations that have not previously been updated to reflect changes made in 1978. IRS stated that the final rule eases transitional administrative burdens associated with the implementation of TCJA. In addition, this rule finalizes proposed regulations on overall foreign losses and a U.S. taxpayer’s obligation to notify IRS of a foreign tax redetermination.
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Written by Kat Jennings | Posted in TaxConnections

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

04 Dec 2018

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

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).

Written by IRS | Posted in Foreign Tax Credits

04 Oct 2018

What U.S. Expat Needs To Know About Foreign Earned Income Exclusion

While all Americans are taxed in their worldwide income regardless where they reside, they also have Foreign Earned Income Exclusion to reduce the tax burden. And this is what our today’s tax infographic is about. In 2018 you can eliminate up to $104,100 of foreign earned income on your U.S. expat tax return. Let’s look into details and what this exclusion is about. Read More

Written by Olivier Wagner | Posted in Expatriate Taxes

07 Jun 2018

Form 1116: What Is The Catch?

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

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!
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):

Written by Olivier Wagner | Posted in Foreign Tax Credits • Form 1116

11 May 2018

Filing Taxes As An American Living In Mexico – US Expatriate Taxes Explained

You are going to be required to file US expat taxes no matter in which country you live, but how will they be affected if you’ve chosen to live in Mexico? With the familiar language, proximity to the US, warm weather, and beautiful geography, Mexico is one of the most popular destinations for American expatriates. It is essential to understand how your US tax return will be affected by your move to Mexico, and what US taxes you will be required to pay. On top of your obligation to file and pay US taxes, Mexico has taxes of its own. Read on for the details you need! Read More

Written by David McKeegan | Posted in Expatriate Taxes • Foreign Earned Income • Mexico Tax/ Belize Tax

10 Apr 2018

IRS Reminds Those With Foreign Assets About U.S. Tax Obligations

WASHINGTON — The Internal Revenue Service today reminded U.S. citizens and resident aliens, including those with dual citizenship, to check if they have a U.S. tax liability and a filing requirement. At the same time, the agency advised anyone with a foreign bank or financial account to remember the upcoming deadline that applies to reports for these accounts, often referred to as FBARs.

Here is a rundown of key points to keep in mind:

Deadline For Reporting Foreign Accounts Read More

Written by IRS | Posted in Foreign Assets • IRS

03 Apr 2018

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

Written by Olivier Wagner | Posted in Foreign Earned Income • Foreign Tax Credits • Tax Credit

21 Sep 2017

Expats: Buying Or Selling Real Estate Abroad

All Americans are required to file U.S. taxes and report their worldwide income, wherever in the world they live. Thankfully there are a number of IRS exemptions that can be claimed to reduce or eliminate U.S. tax liability for expats, however even if no U.S. tax is owed, expats still have to file an annual federal return.

There are thought to be around 9 million Americans living overseas, many of whom, particularly those who have moved abroad permanently, consider purchasing foreign real estate. Read More

Written by Hugo Lesser | Posted in Expatriate

28 Jul 2017

Tax Filing For American Freelancers Living Abroad

Millions of Americans living abroad are working as freelancers. Some work mainly for one or more American firms, others freelance for foreign firms or provide services directly to small firms or individuals. Many are settled permanently in one foreign country, others are intending to return to the U.S. after a few years, or they may be Digital Nomads, roaming between Wi-Fi hotspots in different countries providing freelance services online. Read More

Written by Hugo Lesser | Posted in International

19 Aug 2016

U.S. Citizens’ Foreign Tax Credits Against The 3.8% Obamacare Surtax

I wrote a post on August 7, 2016 which discussed the August 5, 2016 decision of the United States Court of Appeals – District of Columbia Circuits in the Esher case. In this case, Justice Millet ruled that:

That extreme reading of the Totalization Agreement rests on nothing more than the Commissioner’s own say-so. It lacks any grounding in the Agreement’s text or in any principle governing the interpretation of international agreements. The tax court’s corresponding disregard of the Totalization Agreement’s textual direction concerning the role of French law in resolving undefined terms and in determining the content of the laws enumerated in Article 2(1)(b) was error and requires reversal.

Written by John Richardson | Posted in International • Tax Controversy • Tax Law