Foreign Tax Credit

As perhaps with any field, we keep learning on the job, but what makes the learning so acute in the case of cross-border accounting is that every case is a live one with serious stakes, every case is unique, and every case is a tangled web of finances and tax laws across continents.

We wanted to share some of our learnings from this past tax season. Some of our clients wanted to know if they were filing US 1040 returns and earning income in India, do they avail the Foreign Earned Income exclusion or Foreign Tax Credit? They are really free to choose, depending on which is more beneficial to them. The way to figure out which is more beneficial is to look at the marginal tax rate (where the taxpayer is at), expected future foreign income (for which the FTC carryover needs to be maintained) and credits (some credits will not be allowed if FEI is claimed). Also, if you want to switch from FEI to FTC, there is a 5 year lock in period to switch back to FEI.