What is Foreign Tax Credit (FTC)?

Foreign tax credit is a credit which you can claim on the taxes paid to a foreign government. If you have paid taxes on your income to a foreign government, you can claim a credit of this tax on your US tax return. This will ensure that your income does not get taxed twice.

Foreign Tax Credit can be used for any type of income such as

• Salary
• Business income
• Bank interest
• Rental property income
• Capital gains and any other source of income

Who can claim Foriegn Tax Credit?      

There are mainly two conditions to availing the Foreign Tax Credit:

• The main purpose of claiming Foreign Tax Credit is to avoid double taxation. Therefore the most important condition is that “you should have paid tax on this income in a foreign country.” Say for example, dividend income is currently tax free in India but taxable in the US. Since you will not have paid any tax on dividend income in India, you will not be able to claim foreign tax credit on dividend income on your US tax return.
• Foreign Tax Credit can be availed only to the extent of tax paid in a foreign country. Say for example, you have earned bank interest in India of Rs. 100,000 and have paid tax of Rs. 20,000 on that income in India.  Since you have paid tax of Rs 20,000 in India, you can only claim a tax credit to the maximum of Rs 20,000 (converted to USD at the prevailing exchange rate) while filing your US tax return. If you owe taxes on your US income at a higher rate of tax, you will have to pay the balance amount while filing your US taxes.