Foreign Tax Credit For Individuals

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Foreign Tax Credit for Individuals: The Foreign Tax Credit is designed to be very simple in nature, as it only requires basic math skills to compute the tax liability with the credit. As mentioned above, income that is earned in a foreign location may be taxed by the respective government of that location. Therefore, because the United States utilizes a global tax system, the individual or entity may be taxed by the foreign government and definitely taxed by the United States government. Therefore in order to reduce the double taxation liability, the government allows U.S. taxpaying entities to reduce U.S. income tax “dollar for dollar (credited) by the amount that has been paid in income tax by a U.S. person to a foreign government” (Adams). Furthermore, there are two limitations on this credit that a U.S. taxpaying entity must be aware of. The first limitation states that only income tax is only susceptible to the credit. To further explain, this means “taxes like Value Added Tax, property taxes, taxes on capital or assets, and any other tax which the U.S. does not consider a tax on income are excluded from the foreign tax credit” (Adams). (However, a valuable tax planning strategy will note that these taxes may be deductible on an individual’s Schedule A for Itemized Deductions. In addition, if an individual owns a business or rents out a building abroad, he/she can deduct these expenses on his/her Schedule C or Schedule E). The second limitation states that an

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