Overview of the Foreign Tax Credit (Form 1116)
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 901(j) income
- Foreign branch
- 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 through the Form 1116 limitation formula.
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.
Foreign Tax Carryovers & Schedule B (Form 1116)
Foreign Tax Credit Carryback and Carryover Rules
- Carryback: 1 year
- Carryforward: 10 years
- TaxSlayer supports 2015–2024
- You need a carryover when:
- FTC is limited
- Foreign taxes exceed 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 2015–2024.
✅ 2. Foreign Tax Carryover From Prior Year
Enter unused foreign tax credit.
✅ 3. Section 905(c) Redeterminations
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
- 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:
- 2020 unused FTC
- 2021 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:
- Passive income
- General category income
Each category is treated separately by the IRS.