FORM 1116, FOREIGN TAX CREDIT

 

Ø  ARE YOU A US CITIZEN AND WORRIED ABOUT TAX PAID IN OTHER COUNTRY, DOES THE SAME INCOME BE TAXED AGAIN IN US

Ø  WHAT DO TO FOR AVOIDING DOUBLE TAXATION OF INCOME

The IRS require U.S. Citizen and U.S. Resident Alien, both those who have a U.S. Green Card and those who meet the substantial presence test, to report and pay taxes on their worldwide income.

Ø  How can you AVOID DOUBLE TAXATION OF INCOME?

1.   Deduct your foreign taxes on Schedule A, like other common deductions.

2. Use Form 1116 to claim Foreign Tax Credit (FTC) and subtract the taxes you paid to                   another country from whatever you owe to IRS.

3.  Use Form 2555 to claim the Foreign Earned-Income Exclusion (FEIE), which allows those         who qualify to exclude some or all of their foreign-earned income from their U.S. taxes.

      Ø What is eligibility for claiming foreign tax credit?

  Taxes paid to other countries will qualify for the FTC when:

·             You have paid the taxes on your income to a local or provincial government.
·             You were legally obligated to pay those taxes
·             You have already paid or accrued the taxes.
·             You did not gain from paying the taxes.

 

 

There are some taxes that cannot be included in FTC:

·           Taxes on income which is excluded from your U.S. gross income
·             Taxes paid to a sanctioned country. 

·              Sales tax, value-added tax, real estate taxes, or luxury taxes paid to a foreign government
·             Taxes on foreign mineral, oil, and gas income
·             Taxes from international boycott operations
·             Taxes related to a foreign tax splitting event
·             Social Security taxes.

Ø What to report in form 1116 and how to report the same?

We should convert all amounts we report on Form 1116 to U.S. dollars, except where otherwise specified. The conversion rate should be the rate in effect on the day you paid the foreign taxes or the date they were withheld. If you choose the accrual method, you generally use the average exchange rate in effect during that tax year.

 

There are 4 Parts of Form 1116

 

·       Part 1 to calculate the taxable income from one to three countries.

                

 

          ·       Part 2 to list taxes paid in both the foreign currency and their U.S. dollar equivalent.

·       Part 3 to figure the FTC for the income category

          

          ·       Part 4 to total all credits from all income categories

Ø  How is taxable income reported in Form 1116?

The taxable income is reported in 7 separate parts and a separate Form 1116 shall be reported for each category of income.

1.     Section 951A category income.

2.     Foreign branch category income.

3.     Passive category income

4.     General category income.

5.     Section 901(j) countries.

6.     Resourced by treaty

7.     Lump-sum distributions:

 

 

 COMPILED BY 

ca. harsimran kaur