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Writing off your foreign taxes

Most of the foreign tax attention of late has been on the Internal Revenue Service's latest effort to get a handle on taxpayer money located outside the United States.

The Offshore Voluntary Disclosure Initiative, or OVDI, deadline was to have expired today, Aug. 31, but because of Hurricane Irene, the IRS pushed the notification date to Sept. 9.

But while the OVDI will cost a lot of taxpayers substantial sums, sometimes foreign taxes can help lower an IRS bill. And that's why the tax-saving option is this week's Weekly Tax Tip.

When your diversified investments result in you paying foreign taxes, that amount is reported in box 6 of the 1099-DIV you receive.

You can either claim that amount as an itemized deduction in the other taxes section of Schedule A. Or you can claim the taxes paid to another country as a credit directly on your Form 1040.

Credits provide a better tax break, since they reduce your tax bill dollar for dollar. But just in case you want to go the deduction route, the IRS let's you make the choice.

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