So if you are working in a foreign country or you are investing in a foreign country, like in their stocks, and you are getting taxes like capital gains taxes…

…then you’re going to want to learn about the foreign tax credit.

So in this post, we’re going to discuss what the foreign tax credit is, break it down so we can easily understand it, and determine how to qualify for it.

Let’s dive in!

What is a Foreign Tax Credit?

So technically, it is a non-refundable tax credit for income taxes paid to a foreign government as a result of foreign income tax withholdings.

This basically means if you made income in a foreign country and you paid taxes in that foreign country, you could get these credits, if that same income is being taxed.

So it basically helps you avoid double taxation, like you don’t pay taxes in the U.S. and a foreign country on the same income.

And that tax credit would be dollar for dollar and non-refundable.

It is important to note that you cannot use this and foreign earned income exclusion on the same income.

Because once you fully understand the foreign earned income exclusion and then the foreign tax credit…

…you’re going to hopefully put together a tax plan that will allow you to balance your tax outcomes with your lifestyle.

For example, if you paid foreign tax on $150k income and exclude $100K under foreign earned income tax exclusion, you still have $50k that could be taxed.

Well, now you can apply those foreign tax credits against that $50k.

But remember, these tax credits also apply to investors.

So if you are investing in foreign stocks, and you pay taxes on those foreign stocks, you are allowed to use foreign tax credits against those gains.

This is huge because some countries could have much lower tax rates than in the U.S.

So if you’re working in a foreign country or just making a huge investment into a foreign country…

…then you have to seriously weigh using the foreign income tax exclusion or foreign tax credit.

Of course, most people assume that having your foreign earned income completely excluded from taxes is the best route to take.

We’ve written a post about the foreign earned income exclusions, so if you want to learn more about it, be sure to read it next.

However, there are times when you should get the foreign tax credit instead.

For example, if you have kids and make under a certain income threshold, you may also want to try to get the child tax credit.

Well with the foreign income tax credit, you still show income, which makes it easier to qualify for the child tax credit.

That is as opposed to just completely wiping your income out with the foreign earned income exclusion.

Or as another example, maybe you simply don’t qualify for the foreign earned income exclusion, then don’t forget that you may be able to use foreign tax credit instead.

So there are definitely different thought processes to consider when you trying to decide between these two.

This type of tax planning is exactly what we want to start helping people with.

And so that’s going to wrap up this quick post on the foreign tax credits!

If you need more help with your taxes, go ahead and contact us today!