Now you can claim your foreign tax credits for the taxes that have been paid in foreign countries. However, not all foreign taxes can be claimed there are few exceptions, and these credits can be carry forward or carry back to the previous or next year. Isn’t that good?
How to manage Foreign Tax Credit –
While filing your tax returns, you can now claim for an itemized deduction or tax credits every year. To claim this benefit it is not at all necessary to work or stay there. Your mutual funds money can also be claimed if you have paid foreign taxes on it or if there were any deductions on them. The only one general rule applied over here is that you can claim tax credits or the deductions, but not both.
What’s better – Tax Credits or Tax Deductions?
Claiming itemized deductions will normally provide you the least tax benefit. Incase if you are not able claim the foreign tax credit for some reason then the best alternative is to deduct these foreign taxes and avail the benefit. Tax credit will normally reduce your tax liabilities on per dollar basis, which is ultimately more valuable than the deductions, in the calculation of taxable income.
Are there any maximum limits to claim this tax credit?
Yes, there’s a limit for it. Your tax credit cannot exceed than the tax liabilities paid in US, multiplied by the percentage. The percentage is the total foreign income source divided by the world-wide income. One of the most important points to remember here is that – if your foreign tax credit exceeds the maximum limit, then you can actually carry forward or carry back this amount in claiming your previous year’s or your future year’s taxes.