A foreign tax credit (FTC) is a tax credit used by U.S. taxpayers to reduce their U.S. federal income tax liability by the amount of foreign taxes paid or accrued on income from non-U.S. sources.
A U.S. taxpayer is required to report their gross income from worldwide sources and pay U.S. federal income taxes on all of their income. To the extent a U.S. taxpayer has foreign source income subject to foreign income taxes, they may be eligible for a foreign tax credit.
The principal purpose of the FTC is to prevent double taxation on the same income. Because U.S. taxpayers have to pay federal taxes on all of their earnings, without the foreign tax credit, they may find themselves paying double taxes on the same income.
The FTC is calculated using Form 1116 (Foreign Tax Credit) with an individual’s Form 1040 (US Individual Income Tax Return).