If you made a purchase abroad, and were hit with sales or value-added tax, you may be able to claim those foreign taxes as a deduction from income on your individual US return. Businesses making foreign purchases can claim foreign sales taxes as part of their deductible operating expenses. The Internal Revenue Service has a comprehensive set of rules covering foreign taxes, as well as forms to complete and file with your returns.
Foreign Income and Sales Taxes
Federal law on foreign taxes is meant to avoid double taxation, the situation in which an individual or business pays taxes more than once on the same income. If you earn foreign income and pay taxes on that money, you can take the tax amount as a credit on your individual US taxes. The IRS requires Form 1116 for this purpose. In addition, a business owner buying goods abroad may deduct the sales or value-added tax on Schedule C, Line 23. Individuals can't directly claim sales taxes paid abroad, however, for a deduction or a credit.
Foreign Sales Taxes and Itemized Deductions
In some cases, foreign sales taxes can make their way to your list of itemized deductions on Schedule A of Form 1040. Unreimbursed employee expenses, for example, may include taxes paid on the purchase of a computer or office equipment, or the lease of a vehicle for a business trip in a foreign country. Travel, meal and entertainment expenses, including any taxes paid, are also deductible, but require further accounting on Form 2126.
Figuring Deduction Ratio
There's another accounting twist if you've claimed the foreign income tax credit on Form 1116. The IRS requires you to figure the percentage of foreign income to total income, then subtract that percentage from the amount of foreign expenses you take. If you've made half your income abroad, you can only deduct half your foreign expenses. If you've earned all your money abroad, and use it to claim the IRS credit, then none of your foreign expenses would be allowed as deductions.
In the event that foreign tax credits and deductions are greater than the amount of money you owe to the IRS, you may carry over the excess amount to next year's tax return. This option is available to those who file Form 1116, with the carryover amount going on Line 10 of the form.
- IRS.gov: Form 1116
- IRS.gov: Form 1116 Instructions
- Internal Revenue Service. "Foreign Tax Credit." Accessed Jan. 23, 2020.
- Internal Revenue Service. "Publication 514: Foreign Tax Credit for Individuals," Page 3. Accessed Jan. 24, 2020.
- Internal Revenue Service. "Foreign Tax Credit - Choosing To Take Credit or Deduction." Accessed Feb. 9, 2020.
- Internal Revenue Service. "Publication 514: Foreign Tax Credit for Individuals," Page 2. Accessed Jan. 24, 2020.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.