IRS foreign tax credits are designed to reduce your tax liability if you are required to pay taxes on income in both the United States and a foreign country. The problem with the IRS foreign tax credit system is that it’s terribly complex and taxpayers rarely can effectively navigate the IRS rules and regulations without help. This is why you need the support of an international tax consultant with experience and expertise like the international tax team at LSL CPAs when it comes to obtaining IRS foreign tax credits. With such help, you can save a lot of money and avoid paying unnecessary taxes.
IRS Foreign Tax Credits – Deduction or Credit?
When it comes to your IRS foreign tax credits, the Internal Revenue Service website tries to help, but it remains confusing. 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, there is a good chance you may be able to take either a credit or an itemized deduction for those taxes. If you choose to take your IRS foreign tax credits as a deduction, you actually can reduce the amount of taxable income owed to the IRS on account of your previous payment of foreign income taxes.
If you choose to take your IRS foreign income tax credits as a credit, the payment of the foreign income taxes will reduce your IRS tax liability. In the majority of cases, it is to your advantage to take foreign income taxes as a tax credit. As a result, given the two choices, the international tax team at LSL CPAs usually recommends taking the foreign tax credit as the credit it is designed to be.
Revoking IRS Foreign Tax Credits
If you have already chosen to exclude either foreign earned income or foreign housing costs from your taxable income in the United States, you cannot take a foreign tax credit for taxes on income you can exclude. If you do take the credit, the IRS will most likely revoke one or both of the choices. Such complex decisions are a major reason why you need the support of a foreign tax expert.
In addition to making the choice between a tax deduction and a tax credit, there are many compliance issues involved with IRS foreign tax credits. When it comes to giving any credit across the board and specifically in the case of foreign tax issues, the IRS demands that every “i” be dotted and every “t” be crossed.
In the second part of this two-part blog, the expert foreign tax team at LSL CPAs will go through some of the compliance issues that must be addressed when seeking IRS foreign tax credits. Although these compliance issues are intimidating, they can be managed with proper support in handling your IRS foreign tax credits.
IRS Foreign Tax Credits Support
It is important to further note that this article presents only a partial view of the subject matter. It does not claim or attempt to be comprehensive or perfectly accurate. To learn more about how IRS Foreign Tax Credit compliance issues, please call International Tax Consultant Yana Weaver at 714.569.1000.
