If you are an expat, the chances are high that you have heard of the Foreign Tax Credit. This IRS provision permits expats to claim U.S. tax credits if they have already paid taxes in another country. This tax credit prevents taxation from happening twice on the same income.
Some expats might not be familiar with this Foreign Tax Credit. Keep on reading to learn about the reasons that an expat should claim this Foreign Tax Credit.
It Reduces Tax Liability
The most critical reason you should claim the Foreign Tax Credit is that it reduces your U.S. tax liability. Rather than paying large sums on the same income, you can use this credit to reduce the total tax bill in the United States. The reductions translate dollar for dollar from the Foreign Tax Credit.
Getting rid of extra taxes is beneficial to all expats. If you are eligible, you should claim the Foreign Tax Credit. It will serve you well when the time comes to pay for the income that you have.
It Creates an Easier Filing Process
Claiming the Foreign Tax Credit will make for an easier filing process overall. Compared to other forms, such as the Foreign Earned Income Exclusion, you will need to provide a lot less information to receive the Foreign Tax Credit. This removal of requirements will save you a lot of precious time.
Some of the items that you don’t need to include when claiming a Foreign Tax Credit include:
- Specific dates
- Duration of U.S. stay
You will need these to claim the FEIE, but not the Foreign Tax Credit.
The time you will save by claiming the Foreign Tax Credit is great. Easy filing processes mean less stressful tax seasons.
It is Easy to Qualify
If you pay taxes to other countries, there are a few ways you can qualify for the Foreign Tax Credit. These are simple and easy to check off of the list for most U.S. expats. This list is different from many other credits, where qualifying is much harder to do.
You can qualify for the Foreign Tax Credit if:
- You legally had to pay the tax in the other country
- You didn’t gain anything from paying the foreign tax
- You already paid or received the tax
- You paid the tax with your income to a provincial government
Any of these items will qualify you for the Foreign Tax Credit.
Of course, some items cannot be included with the Foreign Tax Credit. You should consult an expat tax specialist to discern this. Some of these taxes include sales tax paid to a foreign government, taxes paid to a sanctioned country, and sales tax on oil and gas.
For expats, the Foreign Tax Credit might seem like another additional step in the long list of tax requirements that they face. However, it can be very beneficial in terms of paying less tax.
The Foreign Tax Credit reduces tax liability for the individual, creates an overall easier filing process, and is easy to qualify for as an expat. An expat should claim the Foreign Tax Credit if they are able to do so.