Foreign Tax Credit

Foreign Tax Credit
The Foreign Tax Credit is a tax benefit that allows U.S. taxpayers to reduce their U.S. tax liability by the amount of foreign income taxes they have paid or accrued to foreign governments. This credit is designed to mitigate the double taxation that occurs when income is taxed in both the foreign country and the United States.

To qualify for the credit, taxpayers must report their foreign income and provide supporting documentation of the foreign taxes paid. The credit can be claimed on Form 1116 for individuals or on the appropriate corporate tax forms for businesses.

For example, if a U.S. citizen earns $10,000 in foreign income and pays $1,500 in taxes to a foreign government, they may be eligible to claim a credit of up to $1,500 against their U.S. tax liability, effectively reducing the impact of being taxed in both jurisdictions.