For any “qualified foreign taxes” that you’ve paid—and this includes taxes on income, dividends and interest—you can claim either a tax credit or a deduction (if you itemize) on your tax return.

How are foreign tax credits calculated?

Your foreign tax credit cannot be more than your total U.S. tax liability multiplied by a fraction. The numerator of the fraction is your taxable income from sources outside the United States. The denominator is your total taxable income from U.S. and foreign sources.

How do I get foreign tax credit?

File Form 1116, Foreign Tax Credit, to claim the foreign tax credit if you are an individual, estate or trust, and you paid or accrued certain foreign taxes to a foreign country or U.S. possession. Corporations file Form 1118, Foreign Tax Credit—Corporations, to claim a foreign tax credit.

What does it mean to have a foreign tax credit?

The foreign tax credit is a non-refundable tax credit for income taxes paid to a foreign government as a result of foreign income tax withholdings. A passive foreign investment company (PFIC) is a foreign corporation, in which at least 75% of a corporation’s income is considered “passive.”.

What kind of taxes do you pay on a foreign investment?

When Americans buy stocks or bonds from foreign-based companies, any investment income (interest, dividends) and capital gains are subject to U.S. income tax and taxes levied by the company’s home country. The U.S. tax code offers the “foreign tax credit,” which allow allows foreign taxes to offset some of your liability to Uncle Sam.

What happens when you pay taxes to a foreign government?

If the tax you paid to the foreign government is higher than your U.S. tax liability, then the maximum foreign tax credit you can claim will be the U.S. tax due, which is the lesser amount.

How much interest can I claim on my foreign tax return?

If you are a U.S. citizen, resident alien, or domestic estate, and your gross foreign source income (including any income excluded on Form 2555 or Form 2555-EZ) does not exceed $5,000, you can allocate all of your interest expense to U.S. source income.