Loading the player...

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.

RELATED TERMS
  1. Foreign Earned Income Exclusion

    The amount of income earned from a foreign source that is excludable ...
  2. Non-Refundable Tax Credit

    A non-refundable tax credit is a tax credit that can only reduce ...
  3. Foreign Investment

    Flows of capital from one nation to another in exchange for significant ...
  4. Worldwide Income

    Worldwide income is an aggregation of a taxpayer's domestic and ...
  5. Foreign Debt

    Foreign debt is an outstanding loan that one country owes to ...
  6. Federal Income Tax

    A federal income tax is levied by the United States Internal ...
Related Articles
  1. Taxes

    Understanding taxation of foreign investments

    Any interest, dividends and capital gains are subject to U.S. tax, but the foreign tax credit enables you to deduct most of the tax you've paid abroad.
  2. Financial Advisor

    Advisors: Don’t Overlook This Foreign Dividend Tax

    Paying income tax on income earned from foreign investments can be a tricky proposition. Here's what advisors and their clients need to know.
  3. Taxes

    The Impact Of U.S. Corporate Taxation On Investment Decisions And CFC Transfer Pricing

    To avoid taxation, businesses do careful tax planning, taking into consideration more than one country's taxation system.
  4. Personal Finance

    5 Tax Credits You Shouldn't Miss

    If you're not taking advantage of these deductions, you could be missing out on tax savings.
  5. Taxes

    What's IRS Form 1040 For?

    Most U.S. taxpayers will be familiar with the 1040. By the end of filling it out, you'll know how much tax you owe, or what your refund is.
  6. Investing

    Protect Your Foreign Investments From Currency Risk

    Hedging against currency risk can add a level of safety to your offshore investments.
  7. Insights

    6 Tax Forms for Investors Who Have Money Abroad

    If you're a U.S. citizen or resident, and you own assets in other countries, you might need to file these six forms with the government.
  8. Taxes

    How To Pay Taxes If You're Overseas

    Here is a step by step guide to paying taxes if you are a U.S. citizen living overseas.
  9. Taxes

    20 Tax Changes You Need To Know About

    Don't miss out on the tax changes. Here's a list that you need to know about.
  10. Insights

    Cautionary Signs For International Investors

    "Going global" is a fashionable investing style, but investors should know the risks.
RELATED FAQS
  1. What are the advantages of foreign portfolio investment?

    Learn the advantages that businesses can derive from foreign portfolio investment in an increasingly globalized business ... Read Answer >>
  2. How can I trade in foreign futures?

    Discover how an American investor can get started in trading foreign futures, including which regulations and restrictions ... Read Answer >>
Hot Definitions
  1. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  2. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  3. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  4. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  5. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  6. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
Trading Center