global Tax Foreign Tax Credit: Paid vs. Accrued Method Explained August 26, 2025 When U.S. taxpayers earn income abroad, they may be required to pay foreign income taxes. To prevent double taxation, the U.S. offers a foreign tax credit (FTC) to offset U.S. taxes. Taxpayers must use either the paid or accrued method to claim this credit. Understanding the key differences helps with effective tax planning. Quick Takeaways:You have two options: Claim foreign tax credits when taxes are paid (paid method) or when they accrue (accrued method).Paid = Simpler: Best for individuals who pay foreign taxes in the same year they earn the income.Accrued = Strategic: Can offer timing advantages, but it's a permanent election and adds complexity.Choose wisely: Once you elect the accrued method, you can’t switch back without IRS approval.Tax Planning Impact: The right method can affect timing of credits and overall tax liability.Claiming Foreign Tax Credits: Paid MethodUnder the paid method, you claim the foreign tax credit in the year the taxes are actually paid. This is typically the default option for individuals, especially those on a cash basis for accounting. It’s straightforward, once you make the foreign tax payment, you can include it in your FTC calculation.When the Paid Method Helps:If you consistently pay your foreign taxes in the same year you earn the related income.If you want to avoid the complexity and uncertainty of claiming credits for taxes not yet paid.Claiming Foreign Tax Credits: Accrued MethodWith the accrued method, you claim the credit in the year the taxes relate to, regardless of when they are actually paid. For instance, if you earn income in 2024 and the foreign tax is assessed in 2025, you can still claim the credit on your 2024 U.S. return.When the Accrued Method Helps:If there is a timing mismatch between when income is earned and when taxes are paid.If the foreign country delays tax assessments or payments into the following year.If the foreign tax rate is higher in the year of accrual, it provides a larger offset against U.S. taxes in that year.Important Considerations: Paid vs. Accrued Methods1. Irrevocable Election: Once you elect to use the accrued method, the IRS does not allow you to switch back to the paid method without special approval. It is a permanent election unless you obtain IRS consent through a formal request.2. Documentation: Using the accrued method requires you to track the actual foreign tax liability for the year it relates to and ensure that it is eventually paid. If it is later reduced or not paid at all, you may be required to recapture the previously claimed credit.Which Method Should You Choose?There’s no one-size-fits-all answer. The paid method is simpler and works well when foreign taxes are paid in the same year as income. Typically, it is the method chosen in most instances and makes the most sense. The accrued method can be more advantageous if foreign tax payments are delayed or if foreign-source income is higher in a given year. If you're considering the accrued method, remember that it's essentially a one-time decision. Once you make the switch, you are locked into that method going forward. Before You File…Choosing between the paid and accrued methods for foreign tax credits may seem like a technical detail, but it can have real tax consequences. If you’re unsure which approach is best for your situation, or you’re considering switching to the accrued method, it’s wise to consult a tax advisor before filing.
