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# Foreign Tax Credit (FTC)
- URL: https://university.heavnn.io/glossary/foreign-tax-credit/
- Published: 2026-10-13T07:40:00.000Z
- Updated: 2026-10-13T07:39:59.000Z
- Description: A Foreign Tax Credit (FTC) is a double taxation relief under which foreign income tax offsets home-country tax on the same income, within national-law limits.
- Author: Heavnn
- Tags: #glossary, #Import 2026-10-11 07:56

## What Is a Foreign Tax Credit (FTC)?

A Foreign Tax Credit (FTC) is a double taxation relief under which foreign income tax offsets home-country tax on the same income, within national-law limits.

*Also known as: Foreign Tax Credit Relief, Credit for Foreign Taxes.*

## How Foreign Tax Credit (FTC) works

A Foreign Tax Credit (FTC) applies when a resident, or a citizen taxed on worldwide income, is taxed by a source country on foreign source income and the home country also taxes that income, so the foreign tax is offset against the home-country liability rather than deducted from income. The credit is generally capped at the home-country tax attributable to the foreign income, so any foreign tax above that cap is not refunded, and where a tax treaty reduces the source-country rate only the treaty-reduced amount counts. Qualifying taxes are generally income-type taxes; levies such as VAT or wealth taxes are usually outside the scope, and the exact definitions vary by jurisdiction. In the United States, individuals claim the credit on Form 1116, may instead deduct foreign taxes but must choose one method each year for all qualified foreign taxes, and carry unused amounts back one year and forward ten years. Rules for baskets of income, timing, documentation and treaty interaction differ by country, so the outcome of a credit claim depends on both the source rules and the residence rules involved, and on the documentation of foreign tax actually paid, such as assessments or withholding statements.

## Foreign Tax Credit (FTC) vs Foreign Earned Income Exclusion

Unlike the Foreign Earned Income Exclusion, which removes qualifying foreign earnings from the US tax base, a Foreign Tax Credit (FTC) keeps the income taxable and offsets foreign income tax actually paid against the domestic liability. US rules bar a credit for foreign taxes on income already excluded under the FEIE.

|                | Foreign Tax Credit (FTC)                                               | Foreign Earned Income Exclusion                                  |
| -------------- | ---------------------------------------------------------------------- | ---------------------------------------------------------------- |
| Mechanism      | Offsets foreign income tax against home-country tax on the same income | Excludes qualifying foreign earned income from US taxable income |
| Income covered | Earned and unearned foreign income subject to foreign income tax       | Foreign earned income only, under US residence or presence tests |
| Unused relief  | US excess credits carried back one year and forward ten years          | Unused exclusion capacity is not carried to other years          |

## Example

Illustrative example: A software consultant resident in Country A earns consulting fees taxed in Country B at a rate higher than the Country A rate on the same income. Country A applies the credit method: the consultant reports the income at home, computes the Country A tax on it, and offsets the Country B tax up to that amount, so the Country A tax on the fees is reduced to zero but the excess Country B tax is not refunded. In a later year the consultant earns dividends from Country B, where a treaty limits withholding; Country A then credits only the treaty-limited withholding, and any tax withheld above the treaty rate has to be reclaimed from Country B. A US citizen in the same position would generally claim the credit on Form 1116, and any credit unused because of the limit could be carried back one year or forward up to ten years under US rules.

## Common misconception

**Myth:** Paying any amount of tax abroad cancels all home-country tax on foreign income.

**Reality:** A Foreign Tax Credit (FTC) generally offsets only qualifying foreign income tax up to the home-country tax on the same income, so residual home-country tax remains where the foreign rate is lower or the tax does not qualify.

## Frequently asked questions

### How does the foreign tax credit work?

A Foreign Tax Credit (FTC) reduces home-country income tax by the qualifying income tax paid abroad on the same income, generally capped at the home-country tax attributable to that foreign income.

### Is the foreign tax credit better than the foreign earned income exclusion?

The comparison between the Foreign Tax Credit and the Foreign Earned Income Exclusion depends on foreign tax rates, income type and other US items; the IRS bars a credit for foreign taxes on excluded income, so the methods interact.

### Can unused foreign tax credits be carried forward?

Under US rules in IRS Publication 514, unused foreign taxes are carried back one year and then forward to the ten following years; other countries apply their own carryover rules or none.

### Which foreign taxes qualify for a foreign tax credit?

For the US Foreign Tax Credit, generally only income, war profits and excess profits taxes imposed by a foreign country or US possession qualify, and only up to any treaty-reduced rate.

## Related terms

- [Double Taxation Relief](https://university.heavnn.io/glossary/double-taxation-relief/) — Umbrella concept covering credit and exemption methods
- [Unilateral Relief](https://university.heavnn.io/glossary/unilateral-relief/) — Credit granted under domestic law without a treaty
- [Double Tax Treaty (DTT)](https://university.heavnn.io/glossary/double-tax-treaty/) — Treaties allocate taxing rights and mandate credit relief
- [Tax Sparing](https://university.heavnn.io/glossary/tax-sparing/) — Treaty variant crediting foreign tax not actually paid

## Related guides

- [Tax treaties and international taxation](https://university.heavnn.io/tax-treaties-international-taxation/) — How treaties allocate taxing rights before credits apply
- [Global tax reform and US digital nomads](https://university.heavnn.io/global-tax-reform-why-u-s-digital-nomads-should-care/) — US nomad context for credits and exclusions

## Sources

- [IRS, Foreign tax credit](https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit?ref=university.heavnn.io)
- [IRS, Publication 514 (Foreign Tax Credit for Individuals)](https://www.irs.gov/publications/p514?ref=university.heavnn.io)
- [GOV.UK, Tax on foreign income: if you're taxed twice](https://www.gov.uk/tax-foreign-income/taxed-twice?ref=university.heavnn.io)

*Last verified: 2026-10-08\. This entry is general information, not tax or legal advice; rules vary by country and change over time.*