Deducting Foreign Income Taxes

When you decide not to take the foreign income tax credit, you can take the foreign income tax deduction as an itemized deduction. You will use Schedule A for this since it is the tax form that you use for itemized deductions. The only time that you can claim the deduction is if you claim it on income that is subject to U.S. income taxes. If you exclude any of your foreign earnings, then you can't claim a deduction or a credit on them. It is as if you have said they don't exist.

For instance, you may be able to request a refund from the foreign country in which your income is from. If that is the case, then you cannot claim that amount for a deduction. That is because you do have the potential to receive a refund from that country. So to get your money, you can actually request the refund and have a check mailed to you from that country. For the amount that is not refunded, you will be able to claim a deduction just on that amount.

This is a great way for you to be able to reduce your taxable income and also reduce your tax liability. It may not reduce your tax liability significantly, but that is still money you are able to keep in your pocket.

Other foreign taxes

There are other taxes aside from foreign income taxes that you can deduct. If you have paid "real" property taxes on foreign properties, then you can deduct the taxes paid. Again, you use Schedule A to itemize this deduction. You are not able to deduct other foreign taxes, which include taxes paid on personal property when paid to possessions in the U.S. You may decide to claim what is called the "possession exclusion" to not include any possessions.

Just keep in mind that only foreign income taxes are subject to the foreign tax credit. There are no exceptions to the rule except for the fact that "real" property taxes can be deducted. This means that personal property taxes in a foreign country that may be paid to a U.S. possession are not deducted. A possession exemption may be needed in this case.

Claiming foreign income

So when it comes down to claiming your foreign income, it may be in your best interest to do so, especially when you have certain deductions that can reduce the amount of tax liability on your U.S. income taxes by reducing your amount of taxable income. It is up to you to decide what you are going to do based on whether or not you can exclude your foreign income in the first place.

Just make sure that you go about it properly. You can seek professional help when filing your taxes. They can help you to pinpoint exactly how much you can claim for a deduction on your foreign income tax and so much more. It is important to maximize your deductions in order to minimize what you owe.