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Category: Finding Deductions

When can you claim foreign tax credit?

In order to qualify for the credit, one must meet four tests:

  1. The tax must be imposed on you
  2. You must have paid or accrued the tax
  3. The tax must be legal and actual foreign tax liability, and
  4. The tax must be an income tax (or tax in lieu of income tax)

The Foreign Tax Credit is usually calculated using IRS Form 1116. However, you are not always required to use this form. You can generally claim the foreign tax credit without using the form if you meet all of the following conditions.

  • All of your foreign source gross income was “passive category income” (which includes most interest and dividends). However, for this purpose, passive income includes (a) income subject to the special rule for high-taxed income, and (b) certain export financing interest.
  • All the income and any foreign taxes paid on it were reported to you on a qualified payee statement. Qualified payee statement include Form 1099-DIV, Form 1099-INT, Schedule K-1 (Form 1041), Schedule K-1 (Form 1065), Schedule K-1 (Form 1065-B), Schedule K-1 (Form 1120S), or similar substitute statements.
  • Your total creditable foreign taxes are not more that $300 ($600 if married filing a joint return).
  • 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 tax year.

You can find Form 1116 within our program by going Deductions > Enter Myself > Credits > Foreign Tax Credit.

For more information, please review Publication 514.