Not all foreign taxes qualify for the Foreign Tax Credit.
✅ Eligible Foreign Taxes
You may claim a credit for the following types of taxes paid or accrued during the tax year:
✅ Qualifying Tax Types
- Income taxes
- War profits taxes
- Excess profits taxes
These may be paid to:
- A foreign country
- A U.S. possession
- A political subdivision such as a province, city, or state
✅ Taxes Paid “In Lieu Of” Income Taxes
You may also claim taxes paid in place of an income, war profits, or excess profits tax.
✅ U.S. Possessions Treated as Foreign for FTC
For purposes of the credit, the IRS treats taxes paid to:
- Puerto Rico
- Guam
- Northern Mariana Islands
- American Samoa
as foreign taxes.
✅ Non‑Eligible Foreign Taxes
The IRS disallows the FTC for several types of foreign taxes. You cannot claim the credit for:
❌ Foreign taxes you were not legally obligated to pay
❌ Taxes paid to countries without U.S. diplomatic relations or not recognized by the U.S.
❌ Dividend withholding taxes when holding‑period rules are not met
You must hold the underlying stock for:
- At least 16 days in a 31‑day window (standard dividends), or
- At least 46 days for dividends on preferred stock representing >366‑day periods.
❌ Taxes on property where you must make related payments on offsetting positions
(e.g., certain hedging arrangements)
❌ Taxes when property was not held long enough prior to receiving income or gain
❌ Tax payments returned to you as a subsidy
❌ Certain foreign oil and gas extraction taxes
When you lack an economic interest in the oil or gas.
❌ Taxes on income excluded under Form 8873 (Extraterritorial Income Exclusion)
❌ Taxes disallowed under section 965(g)
✅ Summary
Eligible taxes are generally income‑type taxes paid to foreign governments or U.S. possessions. However, the IRS disallows the credit for numerous categories involving improper withholding, short holding periods, non‑recognized countries, subsidies, and special statutory restrictions.