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Frequently Asked Questions

Income earned in other countries (other than the US) and taxes paid to that country can be shown in US returns. There are two options: One involves claiming exclusion and the other involves claiming foreign tax credit (FTC). Form 2555 has to be filed if we claim exclusion. Form 1116 has to be filed in the case of FTC

Merits: In general, filing an exclusion means getting more income from that foreign country

De-Merits: Carry-back or carry forward option is not available. This exclusion is available only for earned income and doesn’t apply to passive income. If you choose to revoke Foreign earned income exclusion, then you will not be able to claim the exclusion for the next 5 years. To file exclusion, we will have to submit a proper explanation statement to the IRS

Merits: Carry back can be done for 1 year and carry forward for 10 years.

De-Merits: Foreign tax credit cannot be claimed for taxes paid on any income which has been excluded from US taxation using the foreign earned income exclusion option

Once you choose to claim an exclusion, that choice remains in effect for that year and all future years unless it is revoked. To revoke your choice, you must attach a statement to your return for the first year stating that you do not wish to claim the exclusion(s). If you revoke your choice, you cannot claim the exclusion(s) for the next 5 tax years without the approval of the IRS
One can either bifurcate according to the US financial year or they can show the income and tax paid according to the other country’s financial year in the US return. But the same format should be followed in subsequent years while filing. It would be better if we bifurcate according to the US financial year
Based on the Adjusted Gross Income, foreign tax paid gets calculated. Hence one cannot claim the entire carryover in the next year itself. In the above example, based on the AGI, credit allowed may be limited and the balance will be carried forward to subsequent years
Dividend received in India is net amount received after tax deduction. This tax amount paid in India can be shown as foreign tax paid in your US return