How to Save on Your US Expat Taxes with the Foreign Tax Credit Formula

As a U.S. expat, you should learn to benefit from various tax incentives, including the Foreign Tax Credit. But what is the Foreign Tax Credit exactly, and what does it mean for U.S. expats?

There are many tax credits available to U.S. citizens, which aim to reduce your tax liability to the IRS. Instead of reducing your taxable income, credits reduce the amount in taxes that you owe. The Foreign Tax Credit prevents U.S. expats from paying too much in taxes twice (once to their current country of residence and again to the United States). There’s a simple formula your CPA can use to calculate your Foreign Tax Credit limit and help you save on your U.S. taxes.

US Tax Help wants to make saving on taxes easier for U.S. expats. Our accountants are available to teach you more about tax credits available to expats and other important tax tips. To learn more about the Foreign Tax Credit, call the CPAs for American expatriates at US Tax Help today at (541) 362-9127.

How Do You Save on Your US Taxes with Foreign Tax Credits?

When completing their annual tax returns, U.S. citizens worldwide can benefit from claiming advantageous tax credits. Understanding exactly what tax credits are can help you learn why it’s important to claim them.

Tax credits are one of several tax incentives available to American citizens. Some are specific to U.S. residents and others, like the Foreign Tax Credit (FTC), are for U.S. expats living overseas. When eligible for a certain tax credit, that credit is applied to your owed taxes. For example, say that you, as a U.S. expat, are eligible for a tax credit worth $300. If you owe $1,000 to the IRS, that amount is reduced to $700 when you take the tax credit.

Some people may be eligible for multiple tax credits that lower the taxes they owe to the IRS at the end of the tax year. Learning more about the tax credits you may be eligible for is crucial, especially as a U.S. expat whose worldwide income is taxed by the IRS. Our accountants for foreign taxes can assess your income and expenses and identify which tax credits you may be eligible for.

Sometimes, taxpayers may confuse credits with another tax incentives available to American citizens, like deductions. These two things are different, and you may be eligible for variations of both. To simplify, tax credits reduce your taxes owed, while tax deductions reduce your taxable income. Often, taking credits and deductions will ultimately lower how much you pay in taxes to the IRS. However, it’s important to make the distinction when discussing tax credits.

What Is the Foreign Tax Credit for US Expats?

Now that you have a better understanding of what tax credits may mean for your annual tax return, it’s time to examine specific credits. For example, the Foreign Tax Credit can benefit American expats living overseas.

The Foreign Tax Credit allows U.S. expats who pay taxes in their current country of origin, which is not America, to take a credit for their taxes paid to a foreign government. Say, for example, you live in England, which operates within a residence-based taxation system. If you pay taxes to the British government as a U.K. resident, that amount can act as a credit to your U.S. taxes. If you pay the equivalent of $500 on income tax to England during the tax year, that $500 will act as a credit you can apply to your American taxes.

The FTC is available to certain U.S. expats living in specific countries. Some countries, like Iran, North Korea, Sudan, and Syria, are sanctioned, meaning you can’t claim an FTC if you’re a U.S. expat living in one of those countries.

You can use a formula to formulate your FTC limit for the year, which a CPA, like those at US Tax Help, can calculate for you. While the Foreign Tax Credit is surely advantageous for U.S. expats to prevent them from paying a substantial amount in taxes to two countries, there’s a bit more to it.

How Can US Expats Calculate the Foreign Tax Credit Formula?

To accurately calculate your Foreign Tax Credit limit for the year as a U.S. expat, there’s a relatively simple calculation your CPA can complete.

The limitation for the FTC is specific to your individual finances. U.S. expats can’t take a credit higher than the limitation, which means it can’t be larger than the amount you’ve paid to a foreign nation.

To calculate this credit, first, divide your foreign taxable income by your total taxable income. This means any income you have from a foreign employer divided by any income from an American employer. Next, take that number and multiply it by your tax liability to the United States. The number you get is your FTC limit.

Without an experienced accountant, like the ones at US Tax Help, to assist you, calculating your Foreign Tax Credit limit may be overwhelming. Just know that this is the threshold, not the amount you can always take. For example, say your FTC is $15,000, but you only paid $10,000 in taxes to your current country of residence. American expats who’ve paid less in taxes to a foreign country than their FTC limit don’t get to take the total amount of a Foreign Tax Credit. In that example, the remaining $5,000 doesn’t go toward your U.S. tax liability.

Our CPAs Can Help US Expats Save with the Foreign Tax Credit

You shouldn’t have to pay a large amount in taxes to both the United States and your country of residence. To learn more about how the CPAs for American expatriates at US Tax Help can help you save with the Foreign Tax Credit, call us today at (541) 362-9127.