You may be entitled to claim the foreign tax credit if you paid foreign income taxes. The foreign tax credit helps relieve you of the burden of paying taxes twice on the same income. The types of foreign income that you may have paid foreign income taxes on include compensation for services provided in that country, interest, rent, royalties, dividends, and pensions.
You are allowed to claim either a foreign tax credit or a deduction for the foreign taxes paid. Usually, the credit will give you the larger tax savings. However, certain restrictions on the credit may make the deduction the better option for you.
Some international mutual funds invest in foreign countries and pay foreign income taxes. If you own shares in an international mutual fund, you may be entitled to claim the foreign tax credit. To find out, check the Form 1099-DIV that your mutual fund company sent you. If the mutual fund paid foreign income taxes, your mutual fund company will report the amount paid on your Form 1099-DIV.
You use Form 1116, Foreign Tax Credit, to calculate the credit. However, if all of the following conditions apply, you can claim the credit directly on Form 1040:
Your foreign income is only from unearned income, such as interest and dividends.
The amount of foreign income taxes that you paid is not more than $300 ($600 if married filing joint return).
All of your foreign income is shown on forms such as Form 1099-DIV or Form 1099-INT.
If you use the interview to enter any foreign income taxes that you paid, TaxCut will calculate the foreign tax credit for you and make sure it is correctly reported.
To learn more, see IRS Publication 514, Foreign Tax Credit for Individuals.