July 21 2020

IRS Issues Practice Unit on Computing Foreign Tax Credits for Individuals

Source: IBFD Tax Research Platform News

The US Internal Revenue Service (IRS) has released guidance on how to calculate the amount of allowable foreign tax credits (FTCs) for individuals. The guidance, in the form of a Practice Unit, sets out the steps to compute FTCs as well as the calculation of the foreign tax credit limitation. Related legislative and administrative resources are also listed. The Practice Unit also notes a number of considerations that may be relevant for auditing purposes.

Practice Units are issued by the Large Business and International (LB&I) division of the IRS for the purpose of internal staff training. The document states that it is not an official pronouncement of law, and cannot be used, cited or relied upon as such.

The Practice Unit bears a Document Control Number of INT-P-218 and indicates a date of last update of 2 July 2020.

Note: US citizens and resident aliens are subject to tax on worldwide taxable income, which includes both US source taxable income and foreign source taxable income (FSTI). When a foreign jurisdiction also taxes FSTI, the United States provides an FTC to relieve this double taxation. The FTC is limited, however, to the amount of US income tax imposed on FSTI. This is called the FTC limitation. In practice, this generally prevents the FTC from being claimed for foreign taxes that exceed the US tax on the same income.