Foreign Tax Credit

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DEFINITION of 'Foreign Tax Credit'

A non-refundable tax credit for income taxes paid to a foreign government as a result of foreign income tax withholdings. The foreign tax credit is available to anyone who either worked in a foreign country or has investment income from a foreign source.

BREAKING DOWN 'Foreign Tax Credit'

The Foreign Tax Credit is claimed on Form 1116, unless the taxpayer qualifies for the de minimis exception. The credit can only be claimed on income that is also subject to domestic taxation.

For example, if some of the taxpayer's foreign income is taxable and some is exempt, then the taxpayer must be able to break down the taxes paid on the foreign income only, and only claim the credit for taxes paid on that foreign income.

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