The Foreign Tax Credit: How U.S. Expats Avoid Double Taxation

Living abroad doesn’t mean escaping U.S. taxes. But with the Foreign Tax Credit (FTC), you can offset taxes paid to foreign governments against your U.S. tax liability. Here’s how it works.

What is the Foreign Tax Credit? The FTC helps U.S. expats avoid double taxation by allowing a credit for foreign income taxes paid. It’s claimed using IRS Form 1116.

Eligibility Requirements

• The tax must be imposed on income.

• It must be compulsory (not voluntary).

• Taxes paid must not be refunded or refundable.
  

Henry, a U.S. citizen working in Germany, earned $120,000 and paid $20,000 in German income taxes. Using the FTC, he reduced his U.S. tax liability by the amount paid abroad, avoiding double taxation.

Key Benefits

• Carryback and Carryforward: Unused credits can be carried back one year or forward up to 10 years.

• Flexibility: You can choose between claiming a credit or a deduction for foreign taxes paid.
  

How Arc&Ledger Can Help We specialize in expatriate tax planning, ensuring you take full advantage of the FTC while maintaining compliance. Reach out to us today.