If you’re a U.S. citizen living abroad, you might be paying taxes in both your host country and the U.S.. The Foreign Tax Credit (FTC) helps prevent double taxation by allowing you to offset U.S. tax liability with foreign taxes paid.
However, many expats don’t use it correctly, leading to overpayments to the IRS. Here’s what you need to know.
What is the Foreign Tax Credit?
The Foreign Tax Credit (FTC) allows U.S. taxpayers to reduce their U.S. tax bill based on income tax paid to a foreign government.
How It Works
You can claim a credit for foreign income taxes paid, but only up to the amount of U.S. tax you would owe on that same income.
Example
- You live in Spain and pay $5,000 in Spanish income taxes.
- Your U.S. tax liability on that same income is $4,000.
- You can use $4,000 of the Foreign Tax Credit to eliminate your U.S. tax bill.
- The remaining $1,000 can be carried back one year or carried forward for up to 10 years to offset future U.S. tax liability.
This ensures you do not pay tax twice on the same income while maximizing future tax benefits.
Who qualifies for the Foreign Tax Credit?
To claim the Foreign Tax Credit, you must:
- Pay a foreign income tax (property taxes, VAT, and sales tax do not qualify).
- Have foreign income that is subject to U.S. taxation.
- File Form 1116 with your U.S. tax return.
If you claim the Foreign Earned Income Exclusion (FEIE) (Form 2555), you cannot claim the FTC on excluded income.
Common pitfalls expats should avoid
1. Claiming FEIE and FTC on the Same Income
You cannot claim the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC) on the same foreign income.
Solution: If you live in a high-tax country, the FTC is often more beneficial than FEIE.
2. Not Using Carrybacks & Carryforwards
If your foreign tax rate is higher than your U.S. tax rate, you may not use all your credits in one year.
Solution: Carry unused credits back one year or forward up to 10 years to offset future taxes.
3. Overlooking Strategic Tax Planning
Many expats miss tax-saving opportunities by not optimizing between FTC, FEIE, and deductions.
Solution: Work with a tax expert to maximize savings and avoid errors.
Why work with us?
At American Tax Filings, we help U.S. expats reduce their U.S. tax bill and avoid costly mistakes.
- Maximize Your Foreign Tax Credit – We ensure you use every eligible tax credit.
- Optimize FEIE vs. FTC – We determine which strategy saves you the most money.
- Carrybacks & Carryforwards – We apply unused tax credits strategically.
Get expert help and avoid overpaying the IRS.
Email us at contact@americantaxfilings.com for a free consultation.
Final Takeaways
- The Foreign Tax Credit helps U.S. expats avoid double taxation.
- Foreign Earned Income Exclusion (FEIE) and FTC cannot be claimed on the same income.
- Unused FTC credits can be carried forward for up to 10 years.
- Proper tax planning can save you thousands.
Want to maximize your tax savings? Contact contact@americantaxfilings.com today.
