The Foreign Tax Credit allows taxpayers to reduce U.S. income tax liability when they pay income taxes to a foreign country or U.S. possession. Form 1116 is required when:
- Foreign taxes exceed the IRS exemption amount ($300 single / $600 MFJ)
- The taxpayer does not qualify to claim the credit directly on Schedule 3
- Foreign-earned income exceeds certain limits
- Taxes are paid on income in multiple foreign categories
Note: Taxpayers with foreign taxes at or below the IRS threshold may receive the credit without Form 1116.
Where to Enter the Foreign Tax Credit
Navigation Path:
- Federal
- Deductions
- Credits
- Foreign Tax Credit (Form 1116)
- Choose the Income Category:
- Passive
- General
- Section 951A (GILTI)
- Foreign branch
- Section 901(j) income
- Income re-sourced by treaty
- Lump-sum distributions
- Select the Country of Residence
- Choose whether taxes were Paid or Accrued
After completing these initial selections, additional schedules — such as Schedule B (carryovers) and Adjustments — will become available.
Foreign Tax Credit Limitation
The foreign tax credit cannot exceed the portion of U.S. tax attributable to foreign-sourced income. This is calculated using the following formula:
Credit limit = (Foreign-source taxable income ÷ Total taxable income) × U.S. tax liability
For example, if 25% of your taxable income is foreign-source, the most you can credit against your U.S. tax bill is 25% of that bill — even if you paid more in foreign tax than that. TaxSlayer calculates this limitation for you based on the income and country information you enter.
If the limitation prevents the taxpayer from using all foreign taxes paid, they may qualify for:
- Carryback (to the prior year)
- Carryforward (up to 10 years)
These are entered through Schedule B inside Form 1116.
Important: Carrying the credit back to the prior year isn't an in-program adjustment to this year's return — it requires filing an amended return (Form 1040-X) for that prior year. Carrying the credit forward, by contrast, is simply tracked on Schedule B and applied in a future year's return.
Foreign Tax Carryovers & Schedule B (Form 1116)
Foreign Tax Credit Carryback and Carryover Rules
- Carryback: 1 year
- Carryforward: 10 years
- TaxSlayer supports carryover entries for the 10 years prior to the current tax year, consistent with the IRS carryforward period
- You need a carryover when:
- FTC is limited
- Foreign taxes exceed the credit limit
- Prior-year unused foreign taxes exist
All carryovers are entered on Schedule B.
When Schedule B Appears in the Program
Schedule B becomes visible only after you select:
- Income category
- Country of residence
- Taxes paid or accrued
Then you will see:
Foreign Tax Carryover Reconciliation → Add Schedule B
What Schedule B Includes
1. Foreign Tax Carryover (Year Selection)
Dropdown for the 10 years prior to the current tax year.
2. Foreign Tax Carryover From Prior Year
Enter unused foreign tax credit.
3. Section 905(c) Redeterminations
A "redetermination" simply means the foreign tax amount you originally claimed later changed — for example, because of a refund, an audit adjustment, a final tax assessment, or a currency fluctuation. Required for:
- Refunds
- Audit changes
- Finalized assessments
- Currency adjustments
4. Other Adjustments
Up to five fields (description + amount).
5. Save and Add Another Year
Use this when entering multiple carryover years.
Form 1116 Adjustments
Adjustments are required when:
- A prior year's foreign taxes are later refunded
- A foreign government recalculates the tax
- Foreign tax amounts change because of a redetermination (see above)
- An error in a prior year's foreign tax was corrected
These adjustments are reported under Section 905(c) and must be entered in:
Foreign Tax Credit → Adjustments for Form 1116
If the taxpayer received a foreign tax refund for a previous year, the following may be required:
- Schedule B entries
- Amended U.S. return(s)
- Revised carryover calculations
Common Scenarios
Scenario 1: Taxpayer Paid Foreign Taxes Only in the Current Year
No Schedule B required. Enter foreign taxes under the appropriate income category.
Scenario 2: Taxpayer Has Prior-Year Carryovers
Enter each year separately inside Schedule B.
Example:
- 2023 unused FTC
- 2024 unused FTC
Both must be entered individually.
Scenario 3: Refund of Prior-Year Foreign Tax
This requires:
- Section 905(c) adjustment
- Schedule B entry
- Possible recalculation of carryovers
Scenario 4: Multiple Foreign Income Categories
A separate Form 1116 (and Schedule B, if needed) may be required for each category you have income in — for example, Passive income and General category income are always treated separately by the IRS.