Foreign Tax Credit for Mutual Funds: A Comprehensive Guide

If you pay a mutual fund tax on shares you own in a foreign fund, you may be eligible for a tax credit. This credit is applied to the income tax you would owe to the IRS, and you will not be taxed twice on the same income as a result. There are several conditions for when this tax credit would apply.

Mutual Fund Foreign Tax Credit

To claim a foreign tax credit, you  must have the tax imposed on you. This essentially means it is a non-elective tax against income earned in the foreign country. For the purposes of a tax credit, overseas U.S. possessions count as foreign territories. Not all funds choose to pass a tax they pay down to their shareholders. You are eligible only if your fund does.

Claiming the Credit

To claim your credit, fill out Form 1099-DIV. This will show the share of income in a foreign fund that you paid taxes on and how much you paid in taxes. Your mutual fund should supply you with this information. Since U.S. taxes tend to be on the high end, you may owe additional taxes on the income. You will have to pay the difference between the tax levels in the two countries, but the credit saves you from paying twice.