Does the Foreign Tax Credit cancel out all US tax liability?
Say a US citizen is residing and earning income in a foreign country, and say that the foreign country imposes income tax that is unquestionably higher than what the US would impose on the same income.
For instance, let's say someone earns the equivalent of 0,000 USD in a foreign country, and pays 5,000 of it towards that country's income tax. The tax that would be assessed against an equivalent income in the U.S. is around ,000.
Does the Foreign Tax Credit essentially mean that this person would owe zero tax to the U.S., even though their income exceeds the amount protected by the 'Foreign Earned Income Exclusion'?
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In my experience, the answer is a guarded yes.
Keep in mind that you still owe the USA a tax return in order to claim the benefits of the various deductions and credits.
There is also AMT, Alternative Minimum Tax. It is a completely separate income taxation system, and may treat some of the foreign items differently. The goal of AMT was to keep rich folks, like you :-), from paying too little.
Once you are residing and earning overseas, you probably need a CPA or similar expert creating or at least reviewing your US tax returns.
Does the Foreign Tax Credit essentially mean that this person would
owe zero tax to the U.S., even though their income exceeds the amount
protected by the 'Foreign Income Exclusion'?
Not necessarily. In many cases it does, but there are cases where it doesn't. Foreign tax credit is divided into different buckets, and you may have extra credit in one bucket that would exceed your US tax liability, but not enough credit in another bucket, and you'll have to pay US tax even though you still have some foreign tax credit left for another kind of income.
You need to follow the instructions to the IRS form 1116 very carefully.
By the way, there's no such thing as "Foreign Income Exclusion". There's "Foreign Earned Income Exclusion", and you should use the IRS form 2555 to calculate it. The difference is not just semantic.
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