You cannot claim a foreign tax credit on the same income you excluded from income using Form 2555, Foreign Earned Income Exclusion.
The following four tests must be met for any foreign tax to qualify for the credit:
- The tax must be imposed on you
- You must have paid or accrued the tax
- The tax must be legal and actual foreign tax liability, and
- The tax must be an income tax (or tax in lieu of income tax)
Do I need to use Form 1116?
The Foreign Tax Credit is usually calculated using IRS Form 1116. However, you are not always required to use this form. You can generally claim the credit without using Form 1116 if all of the following conditions are met:
- All of the gross income from the foreign source, including interest and dividends, was “passive income". In this instance, however, passive income includes (a) income subject to high-taxed income rules, and (b) certain financing interest for exporting.
- A qualified payee statement was used to report all the income and all the foreign taxes paid on the income. Such qualified payee statements include: Form 1099-DIV, Form 1099-INT, Schedule K-1 (Form 1041), Schedule K-1 (Form 1065), Schedule K-1 (Form 1065-B), Schedule K-1 (Form 1120S), or any like statements used as a substitute.
- Your total creditable foreign taxes are not more than $300 ($600 if married filing a joint return).
- You elect this procedure for the tax year.
If you choose to take the credit without filing Form 1116, you cannot carry back or carry over any unused foreign tax to or from this tax year.
- Deductions - Select my forms
- Foreign Tax Credit Form 1116
For more information, please review Publication 514.