Dear Tax Talk,
I am living in the U.S. and doing business in several other countries. I pay income taxes in each country I do business in. Do I have to pay taxes also in the U.S.?
If you’re living in the U.S., you have to file income taxes in the U.S. Although you have to file, it doesn’t mean you have to pay.
If you have paid income taxes in other countries, these taxes are credited against your U.S. income tax liability to determine if you have to pay income taxes to the U.S.
If you are self-employed, you may have paid enough income taxes to avoid paying income tax to the U.S., but you still could owe self-employment tax on your net income. You cannot claim income taxes as a credit against self-employment tax.
Claiming credits for foreign income taxes against U.S. income taxes is a complex part of the U.S. tax law. Form 1116 is used to identify the sources of income by type of income and country.
Depending on the complexity of your foreign income, you may need to complete more than one Form 1116. In each column of the form, you’ll need to identify each country you did business in, as well as the gross income and direct business expenses. You’ll also need to allocate indirect expenses from your individual income taxes.
After you’ve made these allocations, you’ll develop a ratio of foreign income to total income. If this ratio is 100 percent, you can offset 100 percent of your U.S. tax liability, provided you have paid that much in foreign income taxes.
If your foreign taxes paid are less than the U.S. taxes, you owe a check to Uncle Sam. If the foreign taxes are more, you have a carryforward or carryback of foreign taxes to use in future or prior years. You would claim a carryback to recover U.S. income taxes paid in prior years on foreign income, if possible. Otherwise, any unused foreign tax credit can be carried forward five tax years.
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