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If you work in another country: You'll still have to le a US tax return if your income

exceeds the ling requirement amount for your ling status. hether or not you will

!ay any US income taxes will de!end u!on a num"er of factors. You may "e eligi"le

to claim the #oreign $arned Income %redit using form & to exclude some or all of 

your foreign earned income from US taxation. (owever once your income exceeds

the exclusion ca! )around *+,k currently- you'll !ay tax as if the exclusion was notthere. hat !uts most tax!ayers in the &/ "racket for every dollar over the ca!.

See I0S 1u" 2 htt!:33www.irs.gov3!u"3irs4!df3!2.!df for more information.

5lternatively you can claim a deduction or credit for the foreign taxes !aid6 using

#orm 7778. If you're in a country with high income taxes that would often "e more

"enecial than the #$I$. See I0S 1u" 72 htt!:33www.irs.gov3!u"3irs4!df3!72.!df for

information on that.

Im!ortant 9ote: he a"ove "enets only oset or avoid I9%;<$ taxes. 5nd the #$I$

only a!!lies to earned income. If you are self4em!loyed in the foreign country you

still must !ay the US Self4$m!loyment tax on the income. You can use #orm 7778 toclaim the credit for any foreign taxes on unearned income as well as earned income.

#or this reason it's often necessary to gure your taxes several ways to determine

the "est way to le.

 he US taxes you on worldwide income. !lease read I0S !u" 2 "efore you go. If

you meet the ==, day test6 you can exclude some of the foreign earned income44"ut

only if you le and make that election. If you don't meet the ==, day test6 "ut !ay

taxes to the other country )unlikely if there is a treaty-6 you can take a tax credit for

the taxes !aid )see irs !u" 72

#oreign ax %redit 4 %hoosing o ake %redit or >eduction

<aking the %hoice: You can choose each tax year to take the amount of any

qualied foreign taxes !aid or accrued during the year as a foreign tax credit or as

an itemi?ed deduction. You can change your choice for each year's taxes.

 o choose the foreign tax credit6 you generally must com!lete #orm 77786 #oreign

 ax %redit and attach it to your U.S. tax return. (owever6 you may qualify for an

exce!tion that allows you to claim the foreign tax credit without using #orm 7778.

0efer to (ow o #igure the %redit. o choose to claim the taxes as an itemi?ed

deduction6 use Schedule 5 )#orm 7,2,-6 Itemi?ed >eductions.

9ote: #igure your tax "oth ways4claiming the credit and claiming the deduction.

 hen ll out your return the way that "enets you most. See hy %hoose the %redit

"elow.

%hoice 5!!lies to 5ll @ualied #oreign axes: 5s a general rule6 you must choose to

take either a credit or a deduction for all qualied foreign taxes.

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If you use an accrual method of accounting6 you can claim the credit only in the

year in which you accrue the tax. #oreign taxes generally accrue when all the

events have taken !lace that x the amount of the tax and your lia"ility to !ay it. If

you are contesting your foreign tax lia"ility6 you cannot accrue it and take a credituntil the amount of foreign tax due is nally determined.

%ash <ethod of 5ccounting

If you use the cash method of accounting6 you can choose to take the credit either

in the year you !ay the tax or in the year you accrue it. You are using the cash

method of accounting if you re!ort income in the year you actually or constructively

receive it6 and deduct ex!enses in the year you !ay them.

%hoosing to 5ccrue axes

$ven if you use the cash method of accounting6 you can choose to take a credit for

foreign taxes in the year they accrue. You make the choice "y checking the "ox in

1art II of #orm 7778. ;nce you make that choice6 you must follow it in all later years

and take a credit for foreign taxes in the year they accrue. In addition6 the choice to

accrue foreign taxes a!!lies to all foreign taxes qualied for the credit. You cannot

take a credit for some foreign taxes when !aid and take a credit for others when

accrued.

If you make the choice to accrue foreign taxes and !ay them in a later year6 you

cannot claim a deduction for any !art of the !reviously accrued taxes.

#oreign %urrency

 You must ex!ress the amounts you re!ort on your U.S. tax return in U.S. dollars. If

you receive all or !art of your income or !ay some or all of your ex!enses in foreign

currency6 you must translate the foreign currency into U.S. dollars. #or information

a"out converting foreign currencies to U.S. dollars refer to #oreign %urrency and

%urrency $xchange 0ates.

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(owever on 1art II of #orm 77786 you must enter the amount of foreign taxes in

"oth the foreign currency denomination)s- and as converted into U.S. dollars. See

the #orm 7778 Instructions for more information. #oreign ax %redit

If you !aid or accrued foreign taxes to a foreign country on foreign source income

and are su"Cect to U.S. tax on the same income6 you may "e a"le to take either a

credit or an itemi?ed deduction for those taxes.

 aken as a deduction6 foreign income taxes reduce your U.S. taxa"le income.

 aken as a credit6 foreign income taxes reduce your U.S. tax lia"ility. In most cases6

it is to your advantage to take foreign income taxes as a tax credit.

;nce you choose to exclude either foreign earned income or foreign housing costs6

you cannot take a foreign tax credit for taxes on income you can exclude. If you do

take the credit6 one or "oth of the choices may "e considered revoked.

%om!liance Issues

 he foreign tax credit laws are com!lex. Eink to #oreign ax %redit %om!liance i!s

for hel! in understanding some of the more com!lex areas of the law. Felow are

some of the com!liance issues:

G#oreign sourced qualied dividends and3or ca!ital gains )including long4term

ca!ital gains6 collecti"le gains6 unreca!tured section 7&, gains6 and section 7&=7

gains- that are taxed in the U.S. at a reduced tax rate must "e adCusted in

determining foreign source income on #orm 77786 line 7a.

GInterest ex!ense must "e a!!ortioned "etween U.S. and foreign source income.

G%harita"le contri"utions are not a!!ortioned against foreign source income.

Ghe amount of foreign tax that qualies is not necessarily the amount of tax

withheld "y the foreign country. If you are entitled to a reduced rate of foreign tax

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"ased on an income tax treaty "etween the United States and a foreign country6

only that reduced tax qualies for the credit.

GIf a foreign tax redetermination occurs6 a redetermination of your US tax lia"ility is

required in most situations. You must le a #orm 7,2,H or #orm 77&,H. #ailure to

notify the I0S of a foreign tax redetermination can result in a failure to notify!enalty.

G5 foreign tax credit may not "e claimed for taxes on excluded income