How Foreign Taxes Are Calculated for the Foreign Tax Credit

To claim the Foreign Tax Credit, you need to identify exactly which foreign taxes qualify — and not every tax paid to a foreign country counts. The credit covers income, war profits, and excess profits taxes that are legal and mandatory obligations to a foreign government (or a political subdivision of one). Foreign taxes that are creditable must be imposed on you specifically (not withheld taxes that belong to someone else), must be imposed on income (not gross revenue or wealth), and must be actual taxes rather than fees, penalties, or deposits. Foreign value-added taxes (VAT), customs duties, and most payroll taxes are not creditable. You can take the credit on a paid or accrual basis — most individuals use the paid basis, meaning you claim the credit in the year you actually pay the foreign tax, regardless of when you earned the income. Amounts withheld from foreign wages are considered paid and qualify for the credit in the year withheld.