In order to qualify for the credit, one must meet four tests:
- 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)
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 of the income and all of 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 that $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.
You can find Form 1116 within our program by going to
- Select My Forms
- Foreign Tax Credit
For more information, please review Publication 514.