Foreign Tax Credit for Individuals: Who Can Take It?

If you paid or accrued foreign taxes to a foreign country on foreign source income and are subject to U.S. tax on the same income, you may be able to take these qualified foreign taxes as a tax credit to offset (in part or in full) your U.S. tax liability. An important questions arises for foreign tax credit attorneys: who is eligible to claim a foreign tax credit on his individual U.S. tax returns.

The first and most obvious category consists of U.S. citizens. If you are a U.S. citizen, you would usually be entitled to take a credit for foreign taxes that you paid or accrued. Part of the reason for this eligibility is the fact that, as a U.S. citizen, you are taxed by the U.S. government on your worldwide income irrespective of where you live.

Resident aliens constitute the second eligible category to claim foreign tax credit. Same reasoning applies as to U.S. citizens.

In most cases, nonresident aliens would not be able to take a foreign tax credit. However, there are important exceptions. The two major exceptions are: Puerto Rico residency or ECI (Effectively Connected Income).

The latter exception requires a bit more explanation. If you are a non-resident alien who pays or accrues tax to a foreign country or a U.S. possession on income from foreign sources that is effectively connected (here where the “ECI” term comes into play) with a trade or business in the United States, then you may be able to claim foreign tax credit on your individual U.S. tax return. ECI is a term of art and whether your foreign income is effectively connected with a trade or business in the United States is a complex legal question that should be reviewed by an international tax attorney.

Note that, where a non-resident alien pays foreign taxes on income from U.S. sources only because he is a citizen or resident of that foreign country, then this tax cannot be used in figuring the amount of the foreign tax credit.

Contact Sherayzen Law Office for Professional Help with Your Foreign Tax Credit

Claiming a foreign tax credit can be a very complex tax question and you need the right professionals to help you. Contact Sherayzen Law Office for experienced professional help with your foreign tax credit issues.