Foreign Tax Credit
Definition
A dollar-for-dollar credit against your U.S. tax liability for income taxes paid to foreign governments. It prevents double taxation on income earned abroad. You can claim the credit on Form 1116 or, for amounts under $300 ($600 for joint filers), directly on Form 1040 without filing Form 1116. The credit is limited to the U.S. tax attributable to your foreign-source income. Unused credits can be carried back one year and forward ten years.
Example
You earn $50,000 from a job in Germany and pay $15,000 in German income tax. On your U.S. return, you can claim up to $15,000 as a foreign tax credit, directly reducing your U.S. tax bill.
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