U.S. taxpayers that have paid or accrued foreign taxes to a foreign country or U.S. possession, while subject to U.S. tax on the same income, may be able to take either a credit or an itemized deduction for these payments for foreign taxes. The foreign tax credit intends to reduce the double tax burden that would otherwise arise when foreign source income is taxed by both the United States and the foreign country from which the income is derived.

Qualifying Foreign Taxes

Taxpayers may only claim a credit for foreign taxes that are imposed by a foreign country or U.S. possession. The tax must meet four tests to qualify for the credit: