Do I have to pay taxes on foreign income?

I will be inheriting commercial property in Italy. Do I have to pay taxes in the United States on the income from the rent on the property?

If you are a United States resident, generally you must report your worldwide income on your U.S. personal income tax return. Furthermore, if you are a resident of California, you must report your worldwide income on your California (or other state) personal income tax return as well. If you are required to file a foreign income tax return or pay taxes to a foreign country, such as Italy, you are eligible for a foreign tax credit on your U.S. income tax return. The foreign taxes you pay will reduce your U.S. taxes owed on a dollar-for-dollar basis, subject to certain limitations. You calculate the allowable foreign tax credit on Form 1116. You can carry back for one year unused foreign tax credits that arose in 2005 and subsequent years, and you can carry forward unused foreign tax credits for ten years until fully used. Any foreign tax credits unused thereafter expire. You will not receive any foreign tax credit on your state personal income tax return.

Foreign taxation and foreign tax credits are a complex area of the tax code. If the matters are significant, consider consulting with your CalCPA-member CPA to make sure that you obtain the full credit that you are entitled to. He or she also can help you avoid errors on your tax returns that could result in additional taxes due along with penalties and interest.

Mitchell Freedman, CPA, PFS, is the owner of MFAC Financial Advisors, Inc., and Mitchell Freedman Accountancy Corporation in Westlake Village, Calif. You can reach him at (818) 905-0321.

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In accordance with IRS Circular 230, the information on this website is not intended or written to be used, and cannot be used as or considered a "covered opinion" or other written tax advice and should not be relied upon for the purpose of avoiding tax-related penalties under the Internal Revenue Code; promoting, marketing, or recommending to another party any transaction or tax-related matter(s) addressed herein; for IRS audit, tax dispute or other purposes.