Passive income on Form 1116 is income in which the taxpayer does not materially or actively participate. This category is used to determine how foreign taxes paid on passive income may be credited against U.S. tax.
Passive income generally includes earnings such as:
- Interest
- Dividends
- Royalties
- Rents
- Annuities
- Other similar investment income
This type of income is commonly reported on Form 1099 (such as Forms 1099‑INT or 1099‑DIV).
Income is not passive if the taxpayer is actively involved, such as:
- Wages or salary
- Self‑employment or business income
- Income from active participation in a trade or business
These types of income fall into other Form 1116 categories, not passive income.
A Few Exceptions to Watch For
Most people with a 1099‑DIV or 1099‑INT can stop here — that income is passive. But a handful of situations pull income out of the Passive category even though it might look passive at first glance:
- High‑taxed income. If the foreign tax paid on the income is unusually high relative to the income itself, it's treated as General Category income instead of Passive.
- Income from a foreign corporation you own 10%+ of. Dividends, interest, rents, or royalties from a foreign corporation where you're a 10%+ shareholder generally aren't passive income.
- Export financing interest and active business rents/royalties. These are excluded from the passive category even though they resemble typical passive income.
- Income from a "financial services" business. If you're in the active conduct of a banking, insurance, or similar financial business, related income may not be passive.
If any of these apply to you — most commonly because you have foreign business ownership, a Schedule K‑3, or unusually high foreign withholding — check how your tax documents categorize the income, or talk with a tax professional. Most retail investors with routine foreign dividends or interest won't run into any of these.
Program Navigation (Where to Enter)
- Federal
- Deductions (Select my forms)
- Credits
- Foreign Tax Credit
- Form 1116
- Passive Income