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.
💰 What Counts as Passive Income?
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).
🚫 What Is Not Passive Income?
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.
🌍 Why Passive Income Matters on Form 1116
ℹ️ Form 1116 separates foreign income into categories
ℹ️ Passive income is calculated separately from general or other income
ℹ️ This affects how much foreign tax credit can be claimed
📚 Additional Guidance
📖 For full definitions, exceptions, and examples, refer to the
Form 1116 Instructions issued by the IRS.