What qualifies for the Foreign Tax Credit?
For starters, you must be a U.S. citizen, U.S. resident alien, or a U.S. nonresident alien who is a full-year resident of Puerto Rico.
You must also have paid (or owe) taxes on foreign income that is also subject to U.S. income tax. The foreign tax must be:
- An income tax (or a tax in lieu of an income tax); and
- A legal and actual foreign tax liability; and
- Imposed on you.
You can't take a credit for foreign taxes that are refundable to you, that are used to provide a subsidy to you or a relative, or that could have been avoided (in other words, non-mandatory taxes).
You also can't take a credit for taxes paid or accrued on income earned in countries during which the U.S. has severed ties or diplomatic relations, or have been designated as a State Sponsor of Terrorism.