The foreign tax credit is intended to reduce the double tax burden that would otherwise arise when foreign source income is taxed by both the United States and the foreign country from which the income is derived.

Generally, only income taxes paid or accrued to a foreign country or a U.S. possession qualify for the foreign tax credit. Under certain conditions, however, taxes paid or accrued to a foreign country or U.S. possession in lieu of an income tax will qualify.

You can choose to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction. To choose the deduction, you must itemize deductions on Schedule A, Form 1040. To choose the foreign tax credit you generally must complete Form 1116 and attach it to your Form 1040.

Your foreign tax credit will be the smaller of the amount of foreign tax paid or accrued, or the amount of U.S. tax attributable to your foreign income. This limit is computed separately for each type of foreign income.

For taxable years beginning in 1998 or later, you will not be subjected to this limit (and therefore will not need to file Form 1116 to claim the credit) if all of the following requirements are met:

1. You are an individual.
2. Your only gross income from foreign sources for the tax year is passive income that is reported to you on a payee statement (such as a Form 1099-DIV or 1099-INT).
3. Your qualified foreign taxes for the tax year are not more than $300 ($600 if you are filing a joint return) and are reported on a payee statement.
4. You elect this procedure for the tax year.

If you make this election, you cannot carry back or carry over any unused foreign tax to or from this year.

If you do not make this election and, because of the credit limit determined on your Form 1116, you cannot use the full amount of qualified foreign taxes paid or accrued. You are allowed a 2-year carry back and then a 5-year carryover of the unused foreign tax.

You may not take either a credit or a deduction for taxes paid or accrued on income you exclude under the foreign earned income exclusion or the foreign housing exclusion. There is no double taxation in this situation because the income is not subject to U.S. income tax.

For more information on the foreign tax credit (including information on whether a particular tax is creditable), see the instructions for Form 1116, and Publication 514, Foreign Tax Credit for Individuals. Forms and publications can be downloaded from this site, or ordered by calling 1-800-829-3676. If the information you need relating to this topic is not addressed in the Form 1116 instructions or in Publication 514, you may call the IRS National Office hotline. The number is area code (202) 874-1460. This is not a toll-free number.

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