The foreign tax credit allows U.S. residents (individuals and companies) to subtract foreign income taxes paid from the U.S. income tax due on income earned abroad. The U.S. employs a global tax system and, under the residence principle, taxes the income earned abroad by its residents. This foreign source income generally is also subject to tax in the foreign country under the source principle. To avoid double taxation of the foreign source income, a credit is given for foreign income taxes. The credit is available to individuals with foreign source income, including wages earned abroad, but the bulk of foreign tax credits goes to U.S. corporations with operations abroad.
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