Foreign tax credit (“FTC”)
When you live and work in a foreign country, you may be subject to that country’s income taxes because you are a resident. Even if you do not meet your host country’s definition of a resident, you may still be taxed on the income you earn in that country. As a U.S. citizen or green card holder you will also be subject to U.S. income tax on your worldwide income, which means that while you are working abroad, some or all of your income could be subject to income tax in both countries. To reduce the possibility of being taxed twice on the same income (known as “double taxation”), the United States allows a credit for foreign tax paid on foreign-source income. If you have U.S.-source income that is being taxed in your host country, that country may allow a similar credit for the U.S. tax. The United States also has tax treaties with many countries, which help to coordinate the foreign tax credits allowed by the two countries.
The amount of foreign tax credit (“FTC”) that the United States will allow is the lesser of the amount of foreign tax paid, or the amount of U.S. tax on the foreign-source income.
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