Let's say a U.S. citizen is residing and earning income in a foreign country that has higher income tax rates than the United States. Would it be possible for them to claim the foreign tax credit on this income and wind up with a tax refund from the U.S. for the difference between the the income tax that the foreign country assessed and the amount of income tax that the U.S. would assess on the same amount of income?
For instance, let's make the following hypothetical/unrealistic assumptions:
- Total foreign earned income: $60,000 USD
- Foreign tax assessed: $20,000 USD
- U.S. federal tax for the same amount of income: $12,000 USD
Is it possible, by way of the foreign tax credit, to report $60,000 in income, $20,000 in taxes paid on that income (which should be credited back against the current year's tax liability), and $12,000 in tax liability (before the credit is applied)? Thereby resulting in a refund being payable in the amount of $8,000 ($12,000 taxes owed - $20,000 paid/credited = $8,000 "overpayment")?
Or is it simply more beneficial to use the foreign income exclusion to say "my taxable income for this year was essentially $0"?