If you paid or accrued foreign taxes to a foreign country or U.S. possession 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.
You can claim a credit only for foreign taxes that are imposed on you by a foreign country or U.S. possession. Generally, only income, war profits and excess profits taxes qualify for the credit. See Foreign Taxes that Qualify For The Foreign Tax Credit for more information.
Taken as a deduction, foreign income taxes reduce your U.S. taxable income. Deduct foreign taxes on Schedule A (Form 1040), Itemized Deductions
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.
If you elect to exclude either foreign earned income or foreign housing costs, you cannot take a foreign tax credit for taxes on income you exclude. If you do take the credit, one or both of the elections may be considered revoked.
File Form 1116, Foreign Tax Credit, to claim the foreign tax credit if you are an individual, estate or trust, and you paid or accrued certain foreign taxes to a foreign country or U.S. possession.
Corporations file Form 1118, Foreign Tax Credit—Corporations, to claim a foreign tax credit.
In 2019, the United States and the French Republic memorialized through diplomatic communications an understanding that the French Contribution Sociale Generalisee (CSG) and Contribution au Remboursement de la Dette Sociale (CRDS) taxes are not social taxes covered by the Agreement on Social Security between the two countries. Accordingly, the IRS will not challenge foreign tax credits for CSG and CRDS payments on the basis that the Agreement on Social Security applies to those taxes.
The IRS’s change in policy means individual taxpayers, who paid or accrued these taxes but did not claim them, can file amended returns to claim a foreign tax credit.
Generally individual taxpayers have ten (10) years to file a claim for refund of U.S. income taxes paid if they find they paid or accrued more creditable foreign taxes than what they previously claimed. The 10-year period begins the day after the regular due date for filing the return (without extensions) for the year in which the foreign taxes were paid or accrued.
Individual taxpayers should write “French CSG/CRDS Taxes” in red at the top of Forms 1040-X, file them with accompanying Forms 1116 in accordance with the instructions for these forms. U.S. employers may not file for refunds claiming a foreign tax credit for CSG/CRDS withheld or otherwise paid on behalf of their employees.
The foreign tax credit laws are complex. Refer to Foreign Tax Credit Compliance Tips for help in understanding some of the more complex areas of the law. Below are some of the compliance issues: