Are you invested in foreign companies or mutual funds with foreign investments? - Tax Tip of the Week

Tax Tip of the Week | Mar. 31, 2010 | No. 34You may be entitled to Foreign Tax CreditsIf you own individual stocks or have investments in mutual funds that invest internationally, you may be paying foreign taxes on the dividends and capital gains generated.  If so, then you are due a credit for those foreign taxes on your federal tax return.The foreign tax credit is calculated on Form 1116.  To properly calculate the credit, you must determine how much of the investment income was attributable to the foreign tax paid.  Example:  You received $400 in dividends, $300 in qualified dividends and $100 in capital gain distributions.  You also paid $50 in foreign taxes.  You must determine specifically how much of the $400/$300/$100 investment income generated the $50 foreign tax.Carefully read your broker statements to determine the allocation.In some instances, you may not be able to take the entire $50 credit on this year’s tax return due to other limitations (that go beyond the scope of this tax tip.)  If this happens, the unused foreign credit will carry forward to the following year’s returns until such time the credit can be used.  Therefore, it is very important to review prior year tax returns to see if they contained any unused foreign tax credits.This is an easy credit to miss...now YOU know.Need help sorting through your tax credits? Just give us a call if you have any questions. In Dayton, call 937-436-3133 and in Xenia, call 937-372-3504. Or visit http://www.bradstreetcpas.com.Rick Prewitt - the guy behind TTW...until next week.