Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), is used to claim a credit for eligible income taxes paid or accrued to a foreign country or U.S. possession. The Foreign Tax Credit helps reduce double taxation when the same income is taxed by both the United States and a foreign jurisdiction.
To qualify for the credit, the foreign tax generally must:
- Be imposed on you,
- Be paid or accrued by you,
- Be a legal and actual foreign tax liability, and
- Be an income tax (or a tax in lieu of an income tax).
Important: You generally cannot claim a Foreign Tax Credit for taxes paid on income excluded under the Foreign Earned Income Exclusion (Form 2555), and you cannot both deduct and claim a credit for the same foreign taxes.
Do You Need to File Form 1116?
Most taxpayers who claim a Foreign Tax Credit must complete Form 1116. However, you may be able to claim the credit directly on Schedule 3 (Form 1040) — without filing Form 1116 — if all of the following apply:
- All of your foreign income is passive income (such as interest or dividends).
- The income and any foreign taxes paid on it were reported to you on a qualified payee statement (such as Form 1099-DIV, 1099-INT, or Schedule K-3).
- Your total creditable foreign taxes are $300 or less ($600 or less if married filing jointly).
If you use this simplified election, you cannot carry any unused credit back or forward to another year.
How Much Credit Can You Claim?
The Foreign Tax Credit is limited to the portion of your U.S. tax that applies to your foreign-source income. TaxSlayer calculates this for you, using a formula along these lines:
Credit limit = (Foreign-source taxable income ÷ Total taxable income) × U.S. tax liability
For example, if 20% of your taxable income is foreign-source, you can generally credit foreign tax against, at most, 20% of your U.S. tax bill for the year — even if you paid more in foreign tax than that. If your foreign taxes exceed the limit, the unused portion isn't lost: you may be able to carry it back 1 year or forward up to 10 years.
The Seven Income Categories
If you need to file Form 1116, you'll need to sort your foreign income into the category (or categories) it belongs to — a separate Form 1116 is required for each category you have:
- Passive income
- General category income
- Section 951A (GILTI) income
- Foreign branch income
- Section 901(j) income
- Income re-sourced by treaty
- Lump-sum distributions
See our Learn More articles on each category if you're not sure which one your income falls into.
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