How does the foreign tax credit work on dividends from international stocks?

When you own international stocks or funds, foreign governments often withhold tax on the dividends they pay you. To avoid being taxed twice, the IRS lets you claim a foreign tax credit – a dollar-for-dollar reduction of your U.S. tax bill for the foreign taxes paid, reported in box 7 of your 1099-DIV. If your total foreign tax is $600 or less ($300 single), you can claim it directly without the complex Form 1116. Here's the catch important for asset location: the foreign tax credit is wasted if you hold international funds inside an IRA or 401(k), because there's no U.S. tax there to offset. So international stock funds generally belong in your taxable account, where you can actually capture the credit. The credit is usually more valuable than taking foreign taxes as an itemized deduction.