How to Use the Foreign Tax Credit to Offset AMT

SmartAsset Team

Thu, Mar 20, 2025, 7:41 AM 6 min read

The foreign tax credit can help mitigate the impact of the alternative minimum tax (AMT) for taxpayers with income taxed abroad. While the AMT limits certain deductions and credits, it does allow a portion of the foreign tax credit to reduce U.S. tax liability . However, specific rules govern how much of the credit applies, including limitations based on foreign-source income and AMT calculations. Understanding these rules can help taxpayers manage their obligations when earning income across multiple tax jurisdictions.

Consider speaking with a financial advisor with tax expertise if you’re looking for ways to mitigate your AMT liability or otherwise optimize your tax strategy.

The alternative minimum tax, or AMT, is a separate tax system aimed at preventing high-income earners from using deductions, credits and exemptions to significantly reduce their tax liability. It applies primarily to individuals with higher incomes, certain business owners and those who claim large deductions.

Instead of the standard tax calculation, AMT requires taxpayers to compute their liability twice-once under regular tax rules and again under AMT rules-paying whichever amount is higher.

AMT calculations start with adjusted taxable income, adding back disallowed deductions, such as state and local taxes, certain medical expenses and some business-related write-offs. Once adjusted, taxpayers apply an AMT exemption, which reduces the taxable amount before applying the AMT rates of 28% and/or 26%. These exemptions phase out at higher income levels, meaning that wealthier taxpayers lose part or all of their exemption, increasing their AMT liability.

2025 AMT Exemptions

The AMT exemption acts as a buffer, ensuring that lower- and middle-income earners rarely face AMT. However, those with substantial foreign income, large capital gains or stock option income may find themselves subject to AMT despite this exemption.

The foreign tax credit (FTC) is available to U.S. taxpayers who pay income tax to a foreign government on earnings generated outside the United States. This credit prevents double taxation by allowing individuals and businesses to offset U.S. tax liability with taxes already paid to another country. The credit applies to income taxes, but not to value-added, sales or property taxes.