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Tax Year 2023 Corporate/Individual Tax Returns

How Can I Save Money With the Foreign Tax Credit?

Posted by Ann Irons, CPA

Dec 9, 2014 10:10:00 AM

foreign-tax-creditIf you are a citizen of a country other than the United States who has generated investment income within the US, you may be eligible to claim the Foreign Tax Credit. This particular credit is open, with certain conditions, to income that would otherwise be taxed by both the United States and your country of residence. However, the requirements for claiming the credit are complex; it is best to partner with a tax preparer who is knowledgeable in matters of foreign investment in the US.

Reporting Capital Gains, Losses, and Dividends

You are required to report capital gains and dividends that have been generated from a foreign source; these are taxable by the US. Under certain circumstances, you may be able to pay only a discounted tax rate. However, to do this you must first have adequate documentation, which must be submitted with your income tax return. You will need to fill out Form 1116, Foreign Qualified Dividends and Capital Gains or Losses. Do not include any of your foreign-sourced income; you will use a tax rate of zero percent. Fifteen percent is standard for American-sourced income. However, the actual tax rate can change from one year to the next and may differ by country.

Apportioning Insurance Expenses

When preparing your tax return, we use the asset method to apportion your insurance expenses between the US and the foreign source. Your tax preparer will also apportion any interest that is generated by loans that you applied for within the US. This is because the Internal Revenue Service classifies money as fungible. By fungible, we mean that the money can be spent, invested, and borrowed for whatever purpose you desire, but only if you follow through and apportion any interest expense incurred. The rule applies to a variety of interest expenses, including that generated from partnerships, passive activity, a home mortgage, and businesses and investments. Your tax preparer will help you complete Form 1116.

About Your Bellingham, MA International Tax Preparer

Questions about claiming the foreign tax credit? For more international tax tips, or to schedule an appointment with Ann Irons, CPA, LLC, contact us at (508) 966-0700. Our office provides tax, accounting, and financial services for investors, individuals, and businesses in and around Holliston Bellingham, Woonsocket, Milford, Medway, Worcester, and the surrounding areas.

Topics: International Tax

About Ann M. Irons, CPA LLC

ann_irons_head_shotAnn spent over 25 years in the financial service industry, gaining knowledge and experience that allows her to provide an array of tax, bookkeeping, and accounting services for her clients. Relying on a stringent code of ethics and a dedication to maintaining the highest industry standards, Ann works hard to ensure her clients receive the quality service they’ve come to expect. A member of AICPA and MSCPA, Ann has also had an article featured in the renowned publication, Banker and Tradesman. 

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