Payroll Dictionary
Foreign tax credit or deduction
If a United States citizen or resident or a domestic corporation incurs or pays income taxes to a foreign country, an election may be made to deduct such taxes in determining taxable income or to take them as a credit against United States tax. The election must be made as to all foreign taxes incurred or paid in the taxable year. Generally, the credit will be limited to the percentage of the total tax against which the credit is being taken that the taxable income from foreign countries is of the total taxable income. Special rules apply to a U.S. shareholder of a controlled foreign corporation or a shareholder in a foreign investment company.