Investing abroad can make you rich. But there are also traps for those who aren't familiar with the way international investing works. The foreign tax credit is one way that investors can get back money they have to pay to foreign governments in tax for their investment income.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at how the foreign tax credit works. Dan notes that many countries have tax treaties that make owning foreign stocks similar to owning U.S. stocks for tax purposes. But other countries don't have those provisions in a tax treaty, and so shareholders in France's Total (TTE 2.99%), Spain's Telefonica (TEF 2.76%), and other dividend-paying stocks around the world need to know what they've paid and how to get it back. Dan points out that the IRS has made it easier to claim a foreign tax credit lately, no longer requiring Form 1116 if your tax-reporting 1099s from your broker include foreign tax amounts and meet all the necessary requirements. Dan concludes that even though foreign investing can be lucrative, it pays to know these rules to get the maximum tax break.