The Foreign Tax Credit can be used to reduce tax paid on income that is taxed both by the United States and a foreign country. Claiming the credit can save you thousands of dollars, but only if you can provide adequate documentation. For this reason, it’s advisable to work closely with an international tax preparer in Bellingham, MA, says Ann Irons.

Where do I report my dividends and capital gains or losses?

Any qualified dividends and capital gains earned from a foreign source are subjected to taxation by the United States. If you intend to pay the discounted US tax rate, you must be able to provide sufficient documentation on your tax return. An international tax expert can help you complete Form 1116, Foreign Qualified Dividends and Capital Gains or Losses. Assuming a tax rate of zero for your foreign-sourced income, it is imperative that you do not include it. A 15 percent tax rate is common but may vary by year or country.

Do I need to apportion my interest expenses?

Using the asset method, your international tax preparer will apportion this expense between both the source and the United States. This also applies to interest on loans secured within the United States. The IRS considers money to be fungible. This means you can borrow it, spend it, and invest it anywhere, and you may do so for any purpose—as long as you apportion the interest expense.

This requirement doesn’t apply to a single type of interest expense, but to all types. For example, you’ll need to apportion the following, using Form 1116:

• Interest from a business or investment
• Interest from home mortgages
• Interest from passive activity and partnerships

What if my foreign-sourced income is less than $5,000?

For a US citizen who earns less than $5,000 in foreign source income, the IRS allows you to allocate all related interest expenses to income sourced within the United States. Otherwise, you must do so to both foreign and US sourced income.

I donated to charity. Can I apportion that money?

Unfortunately, you cannot apportion donations against your income sourced in a foreign country. If you do, you may be subject to severe penalties.

Questions about the foreign tax credit? For more international tax tips, or to schedule an appointment with Ann Irons, CPA, LLC, contact us at (508) 966-0700. Our office provides tax, accounting, and financial services for investors, individuals, and businesses in and around Bellingham, Woonsocket, Milford, Medway, Worcester, and the surrounding areas.