The Foreign Tax Credit (FTC) helps prevent double taxation on income earned abroad. US citizens and residents are taxed on worldwide income but can claim a credit for foreign taxes paid, subject to certain limitations.

Key Concepts

• Credit vs Deduction: Credit directly reduces tax dollar-for-dollar
• Limitation Formula: Foreign income / Worldwide income × US tax
• Income Categories: Passive, general, Section 901(j), and treaty
• Carryover Rules: 1 year back, 10 years forward
• Form 1116: Required for most foreign tax credit claims

Income Categories

• Passive: Dividends, interest, rents, royalties, annuities
• General: Wages, business income, active income
• Section 901(j): Income from sanctioned countries
• Treaty: Income resourced by treaty

Common Pitfalls

• Mixing income categories incorrectly
• Not tracking carryovers properly
• Missing treaty benefits
• Incorrect expense allocation
• Failing to make elections timely

Planning Opportunities

• Time income recognition to maximize credits
• Consider high-tax kickout elections
• Review entity structures for efficiency
• Claim treaty benefits when available
• Plan for AMT interaction