- The Foreign Tax Credit
- The Foreign Earned Income Exclusion
- The Foreign Housing Exclusion
The Foreign Tax Credit (“FTC”) is a tax provision that allows you to receive a credit for certain taxes paid to a foreign government.
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The Foreign Tax Credit
The Foreign Tax Credit (FTC) is a US tax credit available to US taxpayers who have paid foreign taxes. The credit is intended to offset the burden of double taxation, whereby taxpayers are taxed on their income by both the US government and the government of the country where the income was earned. Let’s take a look at how the FTC works.
What is the Foreign Tax Credit?
The Foreign Tax Credit is a tax credit available to U.S. taxpayers who have paid foreign taxes on income earned abroad. The credit is intended to offset the double taxation that would otherwise occur when foreign-source income is subject to both U.S. and foreign tax. To claim the credit, taxpayers must file Form 1116 with their federal income tax return.
How is the Foreign Tax Credit Calculated?
The credit is figured on IRS Form 1116. You’ll carry over any unused portion of the credit to future years. The credit is limited to the amount of tax you owe for the year.
To calculate the credit, you’ll need to figure your taxable income from all sources, both inside and outside the United States. This includes your salary, tips, interest, dividends and capital gains. You’ll also need to determine your total tax liability for the year. Once you have these figures, you can figure your foreign tax credit by completing Form 1116.
What are the Eligibility Requirements for the Foreign Tax Credit?
To be eligible for the foreign tax credit, you must have paid or accrued foreign taxes to a foreign country or U.S. possession on income, war profits, and excess profits taxes. You must be required to make the payments to keep from losing your property under foreign laws.
The Foreign Earned Income Exclusion
The Foreign Tax Credit is a credit for taxes paid to a foreign government on income earned in that country. The credit is available to US taxpayers, including corporations, partnerships, and individuals. The credit is claimed on Form 1116 and is subject to some limitations.
What is the Foreign Earned Income Exclusion?
The Foreign Earned Income Exclusion allows you to exclude a certain amount of your foreign earned income from your US taxable income. To claim the exclusion, you must have foreign earned income and meet either the bona fide residence test or the physical presence test.
There is no limit to the amount of foreign earned income that you can exclude from your US taxable income. However, if you are married and filing a joint return, only one spouse can claim the exclusion. The excluded income is still considered foreign earned income for purposes of the Foreign Tax Credit.
How is the Foreign Earned Income Exclusion Calculated?
The Foreign Earned Income Exclusion is an exclusion from income for qualifying foreign earned income. The maximum amount of foreign earned income that can be excluded from U.S. taxation is $102,100 for tax year 2018 ($104,100 for tax year 2019).
To exclude foreign earned income, you must file a U.S. individual income tax return and attach Form 2555, Foreign Earned Income. When filing Form 2555, you must determine your “period of residence” or “period of physical presence.”
There are two ways to qualify for the FEIE: the bonafide residence test and the physical presence test.
You pass the bonafide residence test if you reside in a foreign country (or countries) for an uninterrupted period that includes an entire tax year (January 1-December 31). You do not have to retake the bonafide residence test in subsequent years unless your tax home changes locations.
You pass the physical presence test if you are physically present in a foreign country (or countries) for at least 330 full days during any period of 12 consecutive months. The 330 days do not have to be consecutive, but they can be within one calendar year or over multiple years. You must retake the physical presence every year you want to claim the exclusion.
What are the Eligibility Requirements for the Foreign Earned Income Exclusion?
In order to qualify for the Foreign Earned Income Exclusion, you must meet all of the following requirements:
-You must have foreign earned income.
-Your tax home must be in a foreign country.
-You must have been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or you must have been physically present in a foreign country or countries for at least 330 full days during a 12-month period.
The Foreign Housing Exclusion
The foreign tax credit is a credit available to US taxpayers who have paid taxes to a foreign country on income earned outside the United States. The credit is claimed on Form 1116 and is available for both individual and corporate taxpayers. The credit is limited to the amount of US tax liability which is attributable to the foreign income. There are also a few other requirements which must be met in order for the credit to be available. Let’s take a closer look.
What is the Foreign Housing Exclusion?
The Foreign Housing Exclusion allows you to exclude a portion of your housing costs from your income when you are working abroad. To qualify, you must have paid your housing costs with foreign earned income. The maximum exclusion is the lesser of your actual housing costs or 16% of your foreign earned income.
How is the Foreign Housing Exclusion Calculated?
The foreign housing exclusion is an IRS-approved way to exclude a portion of your income that is spent on housing while you are working abroad.
To calculate theforeign housing exclusion, you will need to figure out your “housing basis.” Your housing basis is the total of your rent, utilities, insurance, repairs, and other allowable expenses.
Once you have your housing basis, you will need to figure out your “housing percentage.” Your housing percentage is the percentage of your total income that is spent on housing.
Once you have both of these numbers, you can calculate your foreign housing exclusion by multiplying your housing percentage by your total income.
For example, let’s say that you make $100,000 per year and spend $50,000 of that on rent, utilities, insurance, and repairs. This means that 50% of your income goes towards housing costs. If you qualify for the foreign housing exclusion, you can exclude $50,000 of your income from taxes.
What are the Eligibility Requirements for the Foreign Housing Exclusion?
To qualify for the foreign housing exclusion, you must meet all three of the following requirements:
Your tax home must be in a foreign country.
You must have paid qualifying housing expenses.
Your housing expenses must have been for household expenses.
Your tax home is generally the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual. If you do not have a regular or main place of business because of the nature of your work, your tax home may be the place where you regularly live.
Qualifying housing expenses are your reasonable expenses actually incurred for certain housing costs in a foreign country, including rent, utilities (including telephone), insurance, necessary repairs, and other maintenance costs, property taxes, and interest on a mortgage. Your housing expenses may not exceed an amount that is reasonable for someone living in the area where your tax home is located, considering local conditions and any limitations specified by U.S. law or regulation.
Household expenses are necessary expenses for maintaining a household that includes yourself and members of your family who live with you at your tax home in a foreign country. These expenses include food, clothing, housekeeping supplies, furnishings, appliance repairs and maintenance, transportation (including public transportation), education (including school tuition and supplies), medical care (including health insurance premiums), recreation/entertainment activities in which all members of the household can participate together, and telephone use.