If you diversify your investment globally, you will receive dividends from companies and governments of foreign countries. They are reported on your form 1099-DIV box 7 and 8.

To avoid double taxation in the U.S. and a foreign country, a taxpayer has the option of taking the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction called foreign tax deduction. The foreign tax credit is applied to the amount of tax owed by the taxpayer after all deductions are made from his or her taxable income, and it reduces the total tax bill of an individual dollar to dollar. The foreign tax deduction reduces the taxable income of an individual. The benefit of a tax deduction is equal to the reduction in taxable income multiplied by the individual’s effective tax rate. The foreign tax deduction must be itemized, that is, listed out on the tax return.

Foreign tax credit makes more financial sense because it reduces more of your tax bill. But foreign tax credit requires certain qualification, and there is a limit on the amount of credit you can claim, which you calculate on Form 1116. You can claim the smaller of the foreign tax you paid or your calculated limit unless you qualify for one of these exemptions:

• Your only foreign source income for the tax year is passive.
• Your qualified foreign taxes for the year are less than $300 or $600 if married and filing jointly.
• Your gross foreign income and the foreign taxes are reported to you on a payee statement such as Form 1099-DIV or 1099-INT.
• You elect this procedure for the tax year.

If you qualify for an exemption, claim the tax credit directly on Form 1040.

When using TurboTax, it will ask you for an election without telling you whether credit is more advantageous. I sugguest to always select foreign tax credit, and compare with deduction if you cannot claim the full amount of the credit.