There are different types of tax deductions that every citizen should pay to their government. In some states, individual citizens are exempted from particular taxes while others receive lower taxations.
The foreign tax credit allows you to pay a lower income tax. You get this tax credit exemption if you’re currently living abroad (but have citizenship in the US) or have investment income abroad. It helps prevent you from double income taxation by your country and the foreign country you work in. So if you’ve moved from Washington State to Amsterdam, you’re likely eligible to claim this foreign tax credit. Through this measure, you’ll pay a lower income tax than the one you could have paid to both countries.
How It Works
The foreign tax credit is an exemption that can reduce your tax burden. Suppose you did pay income tax as a foreigner; you’re eligible to claim it back. For example, if you have an investment in a foreign country and you currently work there, you should pay both income and property taxes. But if you’re a foreigner, you shouldn’t pay both because of the foreign credit card.
The Foreign Earned Income Exemption
If you did earn income from a foreign country, the IRS would exempt you from paying tax of up to $107,600 in 2020. As an expat, your tax burden during the COVID pandemic period should be lower because of the tax exclusion.
Normally if you’re self-employed but live in a foreign country, or earn wages in a foreign country, then you should pay income tax to the foreign government. But you can exclude part or all of your income from a foreign country from the US federal income tax. However, you can only claim one per year. If you claim the foreign tax credit this year, don’t ask for foreign earned income exclusion.
What are the Requirements?
It’s best to understand that not all the taxes you pay to a foreign country qualify to earn a foreign tax credit. To know if you are eligible for the foreign tax credit, ask yourself if you’ve been paying taxes, currently owe the government any tax, or if the tax is part of your income.
If you didn’t claim the refundable tax credit in 2020, reduce your financial burden during this pandemic. The non-refundable is also a good cushion during the pandemic as it will reduce the tax you owe to the government. It will allow you to get enough earnings during this challenging time. If you qualify for these taxes, use Form 1116 to make your claim.