What is a foreign tax deduction?

What is a foreign tax deduction?

Workers who earn income in foreign countries will frequently pay taxes on the income in the country in which the wages were earned. In such cases the worker may be eligible to take deductions for the amount of taxes paid so that their entire income is not subject to taxes again in their country of citizenship.

Ex-patriot workers who earn income overseas are generally eligible for tax deductions, credits, or exclusions to account for the taxes that they have already paid on their income in the foreign country.

The IRS gives US citizens who have earned foreign income the choice between the three, and the exclusion can be combined with one of the other two but credits and deductions are generally not allowed to be combined or mixed with regard to foreign income, which must be considered in aggregate, even if you have worked in several foreign countries in the same year.

The IRS advises that credits are normally more advantageous to you, because they constitute a dollar-for-dollar reduction in the amount of taxes owed domestically, whereas a deduction only reduces the amount of income subject to taxes. There are instances where a deduction could be more advantageous than a credit, however, and everyone is encouraged to compare the two options after computing each one. In regards to exclusion amounts, these are usually going to be taken before anything else happens, be it a credit or deduction.

The Foreign Earned Income Exclusion allows Americans who have worked abroad to exclude the first $100,800 (in 2016) from US income taxes, and, if the employee was paying a significant amount for a foreign residence, or if the company was giving a residential bonus amount to the employee, an amount up to (and potentially greater than) $30,000 can be added to the already-taken earned income exclusion.

Any income earned over that $130,000 amount may be eligible for credits or deductions if taxes were paid on that amount overseas already.

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