Foreign Tax Credit for Individuals: Tax Bible Series 2016

Introduction
If you paid or accrued foreign taxes to a foreign country on foreign source income and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes. Taken as a deduction, foreign income taxes reduce your U.S. taxable income. Taken as a credit, foreign income taxes reduce your U.S. tax liability.
In most cases, it is to your advantage to take foreign income taxes as a tax credit. The major scope of this publication is the foreign tax credit.
The publication discusses:
• How to choose to take the credit or the deduction,
• Who can take the credit,
• What foreign taxes qualify for the credit,
• How to figure the credit, and
• How to carry over unused foreign taxes to other tax years.
Unless you qualify for exemption from the foreign tax credit limit, you claim the credit by filing Form 1116 with your U.S. income tax return.
Choosing To Take Credit or Deduction
You can choose whether to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction. You can change your choice for each year's taxes.
To choose the foreign tax credit, in most cases you must complete Form 1116 and attach it to your U.S. tax return. However, you may qualify for the exception that allows you to claim the foreign tax credit without using Form 1116. See How To Figure the Credit , later. To choose to claim the taxes as an itemized deduction, use Schedule A (Form 1040), Itemized Deductions.

Figure your tax both ways—claiming the credit and claiming the deduction. Then fill out your return the way that benefits you more. See Why Choose the Credit, later.
Choice Applies to All Qualified Foreign Taxes
As a general rule, you must choose to take either a credit or a deduction for all qualified foreign taxes.
If you choose to take a credit for qualified foreign taxes, you must take the credit for all of them. You cannot deduct any of them. Conversely, if you choose to deduct qualified foreign taxes, you must deduct all of them. You cannot take a credit for any of them.