
An Overview of the Rules Governing the Calculation of Foreign Tax Credits
By Anthony Diosdi The United States taxes U.S. persons on their worldwide income. In order to mitigate the consequence of worldwide taxation, the foreign tax credit rules were developed to prevent U.S. taxpayers from being double taxed. A foreign tax credit is intended to permit U.S. taxpayers to reduce the U.S. federal income tax on its foreign source income by the foreign income taxes paid on that foreign income. The foreign tax credit rules were also enacted to prevent U.S. taxpayers from utilizing foreign tax credits to offset domestic income. Foreign tax credits are not always permitted to offset federal tax liabilities. Foreign tax credits are denied under Internal Revenue Code Section 901(j) for taxes of certain countries with which the United States does not maintain diplomatic relations, and also…