Pitfalls Involving Foreign Tax Credit Calculations

Summary

This article explores operation of the foreign tax credit under I.R.C. Sections 901— 909. When a U.S. taxpayer pays income tax to a foreign country (a word that includes, by the way, a province or city of a foreign country), that taxpayer needs to reflect the income on which the foreign tax was paid as income on his or her U.S. income tax return. That means, potentially, that the taxpayer would be paying tax twice on the same income: once to the foreign government and once to Uncle Sam. The basic concept behind the foreign tax credit is straightforward, but there are numerous traps for the unwary.