Rasmussen College Online
A269/TAX2002 Section 01 Income Tax
April 5, 2012
Foreign Tax Credits
The Foreign Tax Credit is designed to relieve US taxpayers, whether corporate or an individual, of double taxation if their foreign source income is taxed by both the US and the foreign country. Unlike the Foreign Earned Income Exclusion, you do not have to live overseas to qualify for the Foreign Tax Credit. Generally speaking, you can take a Foreign Tax Credit for tax paid on income from a source outside the US. This could include such items as payment for services performed outside the US (foreign earned income), interest from a payer located outside the US, dividends paid by a foreign corporation, and gain on the sale of non-depreciable personal property if you live outside the US. The foreign tax credit is available to individuals with foreign source income, including wages earned abroad, but the great bulk of foreign tax credits go to the U.S. corporations with operations abroad. As global competition grows ever more intense, it is vital to the health of U.S. enterprises and to their continuing ability to contribute to the U.S. economy that they are made free from the possibility of double taxation, excessive foreign taxation, and other barriers to the flow of capital that can serve as obstacles to full participation in the international marketplace. Because foreign trade is fundamental to the economic growth of all U.S. companies the FTC is in essence good. Without the foreign tax credit U.S. based companies would be unable to compete effectively with rivals from foreign countries with territorial tax systems (which exempt companies from tax on their foreign income) or with worldwide tax systems that also prevent double taxation. Americans working abroad, or with payments or investments coming from foreign countries will generally pay tax to...