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:

  1. Total foreign earned income: $60,000 USD
  2. Foreign tax assessed: $20,000 USD
  3. 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"?

1 Answer 1


Found my own answer. Form 1040 states, on line 55 (the line that applies tax credits to total tax liability):

Subtract line 54 from line 46. If line 54 is more than line 46, enter -0-.

Line 46 is tax payable. Line 54 is the total amount of all credits. So the long and the short of it appears to be that credits cannot get you a tax "refund" over and above any amount that has been withheld for federal taxes. At best they can reduce your total tax liability to 0. Which is pretty much the same thing that the foreign income exclusion does, to a point.

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