Mastering Foreign Tax Credits for Corporations and Individuals: Calculations, Carrybacks, Carryforwards and Limitations

Description

The foreign tax credit allows taxpayers, both individual and corporate, to avoid double taxation on foreign-sourced income. For corporate taxpayers, claiming the credit requires successfully coordinating a organization’s tax planning and compliance by the corporate tax manager. Individuals must be aware of the rules and opportunities that go with the foreign tax credit.

The credit is limited to the taxpayer’s pre-credit U.S. income tax liability multiplied by the ratio of the taxpayer’s foreign-source taxable income to its worldwide taxable income. This limitation is applied to two “baskets” of income: passive category income and general category income. Tax advisers must therefore become fully cognizant of the basketing rules to accurately calculate available credits and carryovers.

The income and foreign taxes from one basket cannot be combined with the income and foreign taxes from another basket. To mitigate incorrect income and tax categorization, the regulations contain conflict resolution rules, which corporate taxpayers must understand and prepare for. In addition, by knowing the carryback and carryover rules, corporate tax managers can leverage the timing of income and deductions to preserve tax benefits involved in excess foreign tax credits.

Listen as our experienced panel details how the foreign tax credit rules function, and how to calculate foreign tax credits and complete Form 1118 for corporate taxpayers, and Form 1116 for individuals. The panel will outline which foreign taxes are eligible for Section 901 foreign income tax credits, discuss strategies for determining optimal treatment of creditable foreign taxes, and offer practical guidance regarding claiming the credit, including examples.