Foreign Tax Credit Calculator: Maximize Your Tax Savings on Foreign Income
Use the Foreign Tax Credit Calculator to determine the credit you can claim on your U.S. taxes for taxes paid to a foreign country.
This tool helps you calculate the maximum allowable foreign tax credit to avoid double taxation on foreign income and ensure compliance with U.S. tax regulations.
Plain Text Formula:
Foreign Tax Credit = min(Foreign Taxes Paid, Foreign Income × U.S. Tax Rate on Foreign Income)
Step-by-Step Guide:
Determine the Foreign Taxes Paid: Enter the total amount of taxes paid to a foreign country on foreign income.
Example:
If you paid $4,000 in foreign taxes, the credit amount is $4,000.
Calculate the Foreign Income: Enter the total amount of income earned from foreign sources.
Example:
If your foreign income is $80,000 and you paid $4,000 in taxes, the initial credit amount is $4,000, assuming it does not exceed the limit.
Find the U.S. Tax Liability: Enter your total U.S. tax liability before applying the foreign tax credit.
Example:
If your U.S. tax liability is $6,000 and the foreign taxes paid are $4,000, you can claim $4,000 as a credit, as it does not exceed your liability.
Determine the U.S. Tax Rate on Foreign Income: Enter the U.S. tax rate applicable to your foreign income. This rate is used to calculate the maximum allowable credit.
Example:
If the U.S. tax rate on foreign income is 10%, and your foreign income is $80,000, the maximum allowable credit is $8,000 (10% of $80,000).
Calculate the Foreign Tax Credit: The foreign tax credit is the lesser of the foreign taxes paid or the product of foreign income and the U.S. tax rate on foreign income.
Formula:
Foreign Tax Credit = min(Foreign Taxes Paid, Foreign Income × U.S. Tax Rate on Foreign Income)
Example Calculation:
Foreign Taxes Paid = $4,000
Foreign Income = $80,000
U.S. Tax Rate on Foreign Income = 10% (0.10)
Maximum Allowable Foreign Tax Credit = min($4,000, $80,000 × 0.10)
Maximum Allowable Foreign Tax Credit = min($4,000, $8,000) = $4,000.
Real-Life Example:
Suppose you are an American citizen working abroad and earned $80,000 in foreign income. You paid $4,000 in taxes to the foreign government, and your U.S. tax rate on this foreign income is 10%.
Foreign Taxes Paid:
$4,000
Foreign Income:
$80,000
U.S. Tax Rate on Foreign Income:
10%
U.S. Tax Liability:
$6,000
The maximum allowable foreign tax credit is calculated as the lesser of:
Foreign Taxes Paid ($4,000)
Foreign Income multiplied by the U.S. Tax Rate on Foreign Income ($80,000 × 0.10 = $8,000)
Therefore, the foreign tax credit is $4,000 since it is the lesser amount.
Facts:
Purpose of Foreign Tax Credit:
The foreign tax credit prevents double taxation for U.S. taxpayers who earn income abroad and pay taxes to a foreign government.
Credit vs. Deduction:
The foreign tax credit directly reduces your tax liability, whereas a deduction reduces the amount of taxable income.
Limitations:
The foreign tax credit is limited to the lesser of the foreign taxes paid or the amount calculated using the foreign income and U.S. tax rate.
Carryover/Carryback:
If the foreign tax credit exceeds the limit, it can often be carried back one year or forward for up to ten years.
FAQ:
What is the Foreign Tax Credit?
The Foreign Tax Credit (FTC) allows U.S. taxpayers to reduce their U.S. tax liability by the amount of taxes paid to a foreign country on foreign income. This prevents double taxation on the same income.
How do I calculate the Foreign Tax Credit?
The Foreign Tax Credit is calculated as the lesser of the foreign taxes paid or the product of foreign income and the U.S. tax rate on foreign income.
Is there a limit to the Foreign Tax Credit?
Yes, the foreign tax credit cannot exceed your U.S. tax liability on the foreign income. The credit amount is the minimum of the foreign taxes paid or the allowable credit calculated based on U.S. tax rules.
Can I carry forward or back my Foreign Tax Credit?
Yes, if your foreign tax credit exceeds the current year's limit, you can carry it back to the previous year or forward for up to ten years, depending on U.S. tax rules.
What happens if my foreign taxes are higher than my U.S. taxes on the same income?
If the foreign taxes paid are higher than the calculated U.S. tax on that income, you can only claim the amount up to the U.S. tax liability on that foreign income.