Expat tax · Form 1116
The foreign tax credit takes the income tax you paid abroad off your US income tax on that income.
US citizens and residents pay US tax on income from anywhere, so income earned abroad can be taxed twice. Section 901 lets you credit foreign income tax against your US income tax. Section 904 caps the credit at the US tax on your foreign income, figured on Form 1116.
Updated · Sources
Individual returns
- $300
- is the most total foreign tax you can pay and still skip Form 1116, or $600 on a joint return.
- 10 years
- is how long foreign tax above your limit carries forward, after a 1-year carryback.
- 2
- Form 1116 filings cover foreign wages and foreign dividends, because each category of income has its own limit.
The $300 and $600 limits are fixed by statute and do not rise with inflation.
Can you claim the foreign tax credit?
Check yourself against the first test, and each foreign tax you paid against the other three. Tax that fails any test cannot be credited.
You are a US citizen or resident
US citizens and resident aliens can claim the credit, wherever they live. A green card holder is a resident alien. Nonresident aliens generally cannot claim it.
The tax is a foreign income tax
The credit covers foreign income taxes, and taxes charged in lieu of an income tax, meaning in place of one. The tax can be owed to a foreign country or US territory, or to a city, state or province within one.
You legally owed the tax
Only foreign tax you legally owed can be credited. Tax you could reclaim under a treaty or foreign law does not count, even if you never file the claim.
The income was not excluded
If you claim the foreign earned income exclusion, foreign tax on the income you exclude cannot be credited. On Form 1116, line 12 takes it off as a reduction in foreign taxes. You can still credit the share on pay the exclusion leaves taxable, such as pay above the 2026 cap of $132,900. Foreign tax on dividends counts too.
Estates and trusts claim the credit on Form 1116 too.
How is the foreign tax credit limit calculated?
The limit is your US tax times the share of your taxable income from foreign sources. Once the credit reaches it, more foreign tax no longer lowers this year’s US tax.
No foreign tax
$25,000
With nothing to credit, the full US tax is due.
$10,000 paid abroad
$15,000
All $10,000 is credited, since it is under the $20,000 limit.
$20,000 paid abroad
$5,000
The credit reaches the limit. The $5,000 left is US tax on the other 20%, their income from US sources.
$30,000 paid abroad
$5,000
The credit stays at $20,000, and the other $10,000 becomes a carryover.
Under Section 904(a), the limit is 80% of the $25,000 of US tax, or $20,000. The $25,000 is a round figure for the example, not one from the tax brackets. Foreign wages are general category income, so one Form 1116 covers them. The example assumes no exclusion is claimed on Form 2555.
When can you claim the credit without Form 1116?
Section 904(j) lifts the limit for an individual with a small amount of foreign tax on passive income. The IRS then lets you claim that credit without filing Form 1116. It is an election you make each year, and the conditions in the first two rows must both hold.
| Without Form 1116 | With Form 1116 | |
|---|---|---|
| Foreign income | Passive only Reported, with the tax, on a 1099, K-1 or K-3 | Any kind Including wages |
| Foreign tax | $300 or less $600 on a joint return | Any amount |
| The limit | Does not apply The credit still cannot exceed your regular tax | US tax on your foreign income |
| Carryovers | None, to or from that year | Allowed Within the same category |
| Who can use it | Individuals | Individuals, estates and trusts |
A married person filing separately has the $300 limit, because $600 applies only to a joint return.
Four rules can leave foreign tax you paid without a credit.
Excess credit cannot cross categories
Foreign tax in one category of income cannot offset US tax in another. Wages fall in the general category, and most dividends and interest in the passive category. High tax on your wages therefore cannot cover the US tax on your dividends. Unused tax also stays in its own category when it carries over.
The credit does not cover self-employment tax
The credit offsets income tax only, so it never reduces self-employment tax. A self-employed American abroad can owe no US income tax and still owe self-employment tax.
Switching from the exclusion is hard to undo
The IRS counts a later switch to the credit as revoking the foreign earned income exclusion. Once elected, the exclusion applies every year until you revoke it. After a revocation, you cannot elect it again for five tax years without IRS consent.
Deducting foreign tax gives up the credit that year
The IRS lets you deduct foreign income taxes on Schedule A instead of crediting them, but generally not both in the same year. A year you deduct cannot use carryovers, but it still uses them up as if you had taken the credit. You have 10 years to switch a past year from the deduction to the credit, which may bring a refund. That window is separate from the 10-year carryforward.
Foreign tax credit planning helps you use carryovers before they expire.
Valim’s CPAs help Americans abroad, and US residents who pay foreign tax, claim the foreign tax credit on their US returns.
- We prepare each Form 1116 your return needs, one per category, and track unused foreign tax from year to year.
- We compare the credit with the foreign earned income exclusion before you elect or revoke the exclusion.
- We plan estimated payments for the US tax the credit cannot cover.
- We credit only tax you legally owed, checked against your foreign tax return, and work alongside any local accountant who files it.
- When an IRS letter questions the credit on a return we prepared, we answer it within your fee.
- Individual return
- from $195
- Business return
- from $495
We quote a flat fee before work starts. We do not bill hourly.
Foreign tax credit questions.
What is the foreign tax credit and how do I claim it?
The foreign tax credit is a US credit for income tax you paid to a foreign country or US territory. It reduces your US income tax dollar for dollar, up to the US tax on your foreign income. You usually claim it on IRS Form 1116, filed with your Form 1040. Americans abroad can use it alongside the foreign earned income exclusion, on different income.
How do I know if I qualify for the foreign tax credit?
You qualify if you are a US citizen or resident alien who paid or accrued a foreign income tax. Accrued means owed for the year, even if not yet paid. The tax must be one you legally owed, on income you did not exclude from US tax. Taxes charged in lieu of an income tax, meaning in place of one, also qualify. Tax that a treaty or foreign law would refund to you does not qualify, even if you never ask for it. Nonresident aliens generally cannot claim the credit.
Who has to file Form 1116?
Any individual, estate or trust claiming the foreign tax credit has to file Form 1116. Individuals can skip it under the Section 904(j) election, for a small amount of foreign tax on passive income. You need a separate Form 1116 for each category of income, so foreign wages and foreign dividends take two. Tax paid to the US Virgin Islands goes on Form 8689 instead.
How much foreign tax credit can I claim without Form 1116?
You can skip Form 1116 only if your total foreign tax for the year is $300 or less, or $600 on a joint return. Above that, you need the form to claim any of it. All your foreign income must also be passive, such as dividends and interest. Both the income and the foreign tax paid on it must appear on a payee statement, such as Form 1099-DIV. In return, the Section 904 limit does not apply that year, and no foreign tax carries over to or from that year.
How do I complete Form 1116 for foreign tax credit?
For a 2025 return, the 2025 Instructions for Form 1116 walk through the form line by line. Use one form per category of foreign income, such as general for wages and passive for dividends. On each, report that category’s foreign income and the foreign tax paid or accrued on it. If you excluded income on Form 2555, line 12 cuts the tax by the share on that income. The form then caps your credit at the US tax on the category’s foreign income. For an earlier year, use that year’s form and instructions.
Can unused foreign tax credits carry forward?
Yes, foreign tax above your limit carries back 1 year and then forward up to 10 years. Each year’s excess stays in its own category of income, such as general or passive. A carryover can be used only in a year you take the credit. A year you deduct still uses it up, and counts toward the 10 years. No carryover goes to or from a year in which you claimed the credit without Form 1116.
Sources
- 26 U.S.C. § 901, Taxes of foreign countries and of possessions of United States
- 26 U.S.C. § 904, Limitation on credit
- 26 U.S.C. § 911, Citizens or residents of the United States living abroad
- 26 U.S.C. § 6511, Limitations on credit or refund
- 26 C.F.R. § 1.1-1, Income tax on individuals
- 26 C.F.R. § 1.911-6, Disallowance of deductions, exclusions, and credits
- IRS, Form 1116 (2025), Foreign Tax Credit (Individual, Estate, or Trust)
- IRS, Instructions for Form 1116 (2025)
- IRS, Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad
- IRS, Rev. Proc. 2025-32 (2026 inflation adjustments)
Reviewed and updated September 2026. General information, not advice for your situation.