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Tag Archive for Form 1116

U.S. Expatriates Can Claim Foreign Tax Credit Filing Form 1116

Olivier Wagner - Form 1116
What Is Form 1116 And Who Needs To File It?

When talking about US taxes and taxation of US citizens who live abroad, you may have heard of Foreign Tax Credit and the possibility to offset the US tax owing by using the taxes paid to another country. That way you can narrow the tax owing down to zero!

Most of the US international tax experts prefer claiming Foreign Tax Credit (Form 1116) on client’s U.S. tax return rather than preparing form 2555 (Foreign Earned Income Exclusion), since it is more beneficial. Read further to learn why FTC is a better way to save money on your US expat taxes.

Here are 5 quick facts about IRS Form 1116 and US tax returns:

  1. You claim Foreign Tax Credit on your US expat taxes by filing Form 1116
  2. You attach this form to a Form 1040, your individual US tax return
  3. The credit reduces your US tax liability on expat income dollar for dollar
  4. You cannot take Foreign Tax Credit against income which you have previously excluded by the Foreign Earned Income Exclusion
  5. And you can’t receive a refund of foreign taxes paid through your US tax return

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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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A Point To Ponder

Most of us remember the good old days of the 1990s – a seemingly decisive victory in the First Persian Gulf War, the dot-com bubble that transformed computer geeks into nouveau riche millionaires, and a string of world championships that made the New York Yankees appear seemingly unbeatable. President Bill Clinton did a good job of manning the wheel during most of the decade, although truth be told, almost anyone can sail a ship when the seas are calm and a gentle but steady breeze is filling the sails.

Mr. Clinton did have his shortcomings, most notably his interaction with a certain intern which led to. . . well, we’ll skip all the sordid details. He was certainly not the first President to behave in such a manner, and he will not be the last one, but he was the only one to be caught in such a dramatic fashion. After he appeared before a federal grand jury, Read more

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