An explanation of the foreign tax credit

A “The foreign tax credit is available whenever a person filing a U.S. federal income tax return has paid taxes to a foreign jurisdiction,” said Gene Utterback, member of the Maryland Society of Accountants and an IRS enrolled agent.

That happens most frequently when people invest in global or international mutual funds, he said.

It can also happen if the person lives and works outside the United States and the foreign country the person lives and works in requires the worker to pay taxes in the foreign country.

“The foreign taxes paid can be handled in one of two ways,” he said. “The easiest way is to claim it as an itemized tax deduction just like you’d claim state income taxes paid, but the better way to is to actually claim it as a direct dollar-for-dollar credit.”

Utterback warned the calculations and limitations for the credit aren’t easy, but it can be worth the effort if it’s a substantial amount.