How to file Form 1116: Foreign tax credit example for US expats

If you earn income outside the US, chances are you've run into the issue of double taxation. The IRS offers ways to avoid that, and one of the most effective tools is the foreign tax credit, claimed using Form 1116.

What you'll learn in this guide:

• When Form 1116 is required and who can skip it
• How to calculate your foreign tax credit using the limitation formula
• Income categories (baskets) and how to report them correctly
• A complete Form 1116 example with real numbers and line-by-line guidance
• Common mistakes that trigger IRS scrutiny and how to avoid them

This guide is for US citizens and resident aliens who paid taxes abroad and need to reduce their US tax liability dollar-for-dollar. The process can get complicated, especially if you have income from multiple countries, different types of income, or foreign tax carryovers – we'll break it all down.

What is IRS tax form 1116?

IRS Form 1116 lets US citizens and resident aliens claim the foreign tax credit, reducing their US tax when they've already paid taxes to a foreign country on the same income.

What it does:

• Provides a dollar-for-dollar credit against your US tax liability for foreign income taxes paid
• Helps you avoid paying tax twice on the same income

What it doesn't do:

• It doesn't reduce self-employment tax – only income tax

Keep in mind: It's non-refundable and can't exceed your tax liability, but it can still increase your refund by lowering the tax you owe against payments you've already made

The form calculates the amount of credit you're eligible for, based on your foreign taxes paid and the proportion of your worldwide income that came from foreign sources.

When is Form 1116 required?

You'll need Form 1116 to claim a foreign tax credit when your situation doesn't qualify for the simplified approach.

Under $300 (single) or $600 (married filing jointly) in foreign taxes + all passive income + foreign income and taxes reported on a payee statement (like a 1099) + you elect to claim the credit without filing Form 1116? → You may skip Form 1116 and claim the credit directly on Schedule 3 (Form 1040)

Otherwise? → You must file Form 1116

You'll need Form 1116 specifically if:

• You paid or accrued more than $300 in foreign taxes as a single filer, or more than $600 if married filing jointly
• Your foreign tax situation involves multiple income types or foreign tax carryovers from other years
• You need to comply with FTC limitation rules, which prevent overclaiming the credit

Form 1116 vs Form 2555: The difference

Both foreign tax credit (Form 1116) and foreign earned income exclusion (Form 2555) are tools to help avoid double taxation – but they work in different ways:

• Form 1116 gives you a dollar-for-dollar credit for foreign income taxes paid
• Form 2555 allows you to exclude a portion of your foreign earned income from US taxation entirely

The foreign earned income exclusion (FEIE) lets you exclude up to $130,000 (2025 limit per taxpayer, for filing in 2026) of earned income from your US taxable income if you meet either the bona fide residence test or the physical presence test.

Quick comparison:

 

FEIE is typically more beneficial if:

• You live and work abroad in a country with low or no income tax
• You earn less than the exclusion limit and want to reduce your taxable income easily

FTC is typically more beneficial if:

• You live in a high-tax country and pay substantial foreign taxes
• You have passive income (interest, dividends, royalties) that doesn't qualify for FEIE
• You want to preserve IRA contribution eligibility based on your full earned income

Once you elect to use the foreign earned income exclusion, you can't also claim the foreign tax credit on the same income.

Choosing between Form 1116 and Form 2555 depends on where you live, how you earn your income, and how much tax you've already paid abroad.

At Taxes for Expats, we’ve been doing this for over 20 years – helping thousands of Americans save real money just by getting this choice right. If you’re not sure which way to go – talk to a tax professional.

Who can claim the foreign tax credit: Form 1116 filing requirements

You may be eligible to file Form 1116 if you're a US citizen or resident alien with income from foreign sources that's also taxed by the US.

General requirements:

• You paid or accrued foreign income taxes to a foreign country or US possession (special rules apply to income from US possessions)
• Your income is taxable in the US, and you're not excluding it under the foreign earned income exclusion
• The tax paid qualifies as an income tax (or a tax in lieu of income tax) under IRS rules
• You meet all other IRS requirements for the foreign tax credit, including categorizing your income correctly

Qualify:

• Foreign income taxes (national, provincial, or local)
• Taxes in lieu of income tax (certain withholding taxes on dividends, interest, royalties)
• Taxes based on net income or gross receipts

Don't qualify:

• Value-added tax (VAT)
• Social security taxes (like UK National Insurance)
• Property taxes
• Sales taxes
• Taxes on excluded income (if you use FEIE)

How to calculate the foreign tax credit

Categories of income

When completing Form 1116, you'll need to classify your foreign gross income into IRS-defined categories. Form 1116 is completed separately for each income category you have (passive, general, etc.).

Common categories include:

• Passive category income – interest, dividends, royalties, rents
• General category income – wages, salaries, self-employment income, business profits
• Section 951A category income – Global Intangible Low-Taxed Income (GILTI), typically for US shareholders of controlled foreign corporations
• Foreign branch category income – income attributable to foreign branches of US taxpayers
• Section 901(j) income – income from countries under US sanctions
• Lump-sum distributions – retirement account payouts received as a lump sum

Most expats only need passive + general. If you're a W-2 employee abroad with some dividend income, you'll file one Form 1116 for general (wages) and one for passive (dividends).

Remember: Multiple categories = multiple Forms 1116. Each category gets its own form with its own credit calculation.

The limitation equation

The FTC is limited to the amount of US tax owed on your foreign income. The IRS uses a formula to calculate that limit.

Step 1: Calculate the ratio
foreign source income ÷ worldwide income

Step 2: Apply to US tax liability
Ratio × US tax liability = Maximum foreign tax credit

Step 3: Compare to foreign taxes paid
Your credit is the lesser of:
Foreign taxes you actually paid
The maximum calculated in Step 2

Why the IRS limits it: The foreign tax credit is meant to prevent double taxation, not to eliminate US tax on your US-source income. The formula ensures your credit only offsets the portion of your US tax that applies to your foreign income – not your entire tax bill.

Carryback and carryover

If your foreign taxes paid exceed what you're allowed to claim this year, the unused portion doesn't go to waste.

You can carry back the unused credit to the previous tax year or carry it forward for up to 10 years. This is especially helpful if your foreign tax rate is higher than your US rate or your US tax liability is low in a given year.

Important caveat: Section 951A category income doesn't use carryovers or carrybacks. Form 1116 instructs you to leave the carryover line blank for the 951A category. This applies only to GILTI-related foreign taxes. See IRS Publication 514 for details.

What you must track:

• By category – carryovers are tracked separately for each income category (passive, general, etc.)
• By year – you need to know which year the carryover originated

Where it shows up on the form:

• Part III, Line 10: Carryback or carryover from prior year
• Schedule B (Form 1116): Used to track carryover amounts by category and year

Form 1116 foreign tax credit example

#1 – Passive category (Dividends on 1099-DIV)

Let's walk through a real-world scenario where a US expat has both passive income (dividends) and earned income (foreign wages). This sample Form 1116 shows exactly where each number goes on the form – and how the credit is calculated.

The scenario: You earned $78,000 in foreign wages and received $2,000 in foreign dividends. You paid $16,000 in foreign income tax on your wages – and had $300 withheld on dividends. Your worldwide taxable income is $90,000 – and your total US tax liability (before credits) is $13,500.

Because you have two income categories (passive and general), you'll file two separate Forms 1116 – one for each category.

 

Key calculation: The limitation formula here is: ($2,000 ÷ $90,000) $13,500 = $300. Since your foreign taxes paid ($300) don’t exceed the limitation ($300) – you can claim the full $300 credit.

#2 – General category (Foreign wages)

Example: Net foreign-source taxable wages used on 1116 $78,000; foreign income tax paid $16,000; worldwide taxable income $90,000; US tax for limitation $13,500.

Key calculation: The limitation formula: ($78,000 ÷ $90,000) $13,500 = $11,700. You paid $16,000 in foreign taxes – but the limitation caps your credit at $11,700. The unused $4,300 ($16,000 – $11,700) can be carried forward for up to 10 years.

Part IV + where the final credit goes

 

Bottom line: Your total IRS foreign tax credit (Form 1116) is $12,000 – which reduces your US tax liability dollar-for-dollar. The $4,300 in unused general category credit carries forward to next year – and can offset future US tax on foreign general category income.

High-tax kickout rule

The high-tax kickout (HTKO) rule is an optional provision that applies when passive income is taxed at a high rate by a foreign country.

IRS framing: If foreign taxes on passive income exceed the highest US tax that can be imposed on that income, it's generally treated as general category income instead of passive. This is the essence of the high-tax kickout concept. See the IRS practical considerations for Form 1116.

When you might see this:

• You receive interest or dividends from a country with very high withholding rates (30%+)
• Your foreign passive income is taxed at rates approaching or exceeding the highest US rates
• You want to avoid passive category limitations and pool high-taxed passive income with general category income

Example: If you receive dividends taxed at 25% abroad, and the highest US rate on qualified dividends is 20%, those dividends may qualify for HTKO treatment and be reclassified as general category income.

Understanding the structure of Form 1116

Form 1116 is completed separately for each income category you have (passive, general, etc.). You check the category at the top of the form, and all calculations on that form apply only to that category.

The form is broken into several parts – here's a quick overview of what each section covers:

• Part I - Taxable income or loss from sources outside the United States
  This section is where you report foreign-source taxable income for the single category checked at the top of the form (passive, general, etc.) and allocate related deductions to that category. You'll list gross income by country, then subtract deductions that specifically relate to your foreign income.
• Part II - Foreign taxes paid or accrued
  You report foreign taxes by country, indicate paid vs accrued, show the amounts in foreign currency and US dollars, and break out withholding (dividends / rents & royalties / interest) plus other foreign taxes. This is where you convert foreign currency using the appropriate exchange rate for the year.
• Part III - Figuring the credit
  This is where you apply the FTC limitation formula to determine how much of your foreign tax can actually be claimed as a credit. It also accounts for items like carryovers/carrybacks (if applicable), required reductions, and high-tax kickout (HTKO) before computing the credit for that category.
• Part IV - Summary of credits from all Forms 1116
  If you're filing more than one Form 1116, you generally complete Part IV on only one "summary" Form 1116 to combine the results. It provides the total foreign tax credit that flows to Schedule 3 (Form 1040) (not directly to Form 1040).
• Supporting statements:
  You may need to attach Schedule B (Form 1116) (carryovers/carrybacks) and/or Schedule C (Form 1116) (foreign tax redeterminations), plus any worksheets referenced in the instructions.

Step-by-step guide to filing Form 1116

Filing Form 1116 can be intricate, so it's essential to approach it methodically. Here's a step-by-step guide to help you accurately report your foreign income.

Step 1: Gather your documents

Start by collecting everything you'll need to report your foreign income and taxes:

• Foreign tax returns
• Wage or earnings statements (foreign W-2 equivalent)
• Bank and brokerage statements
• Form 1099-DIV, 1099-INT (if applicable)
• Receipts or proof of tax payments
• Exchange rate info see yearly average exchange rates for converting foreign currencies into US dollars

Step 2: Determine eligibility

Confirm that you qualify to claim the foreign tax credit. If you're under the De Minimis Exception threshold and meet the criteria (under $300/$600, passive income, 1099 reporting, election made), you might not need to file Form 1116 but most taxpayers with significant foreign income will.

Step 3: Choose between FTC and FEIE

You typically need to choose between claiming the foreign tax credit (Form 1116) and excluding foreign earned income (Form 2555). Remember, you can't do both for the same income. This decision affects your tax outcome and your filing status in future years.

Step 4: Complete Form 1116 (Parts IIV)

Fill out Form 1116 for each income category:

Common line inputs:

• Part I, Line 1a: Wages go here (from foreign W-2 equivalent) for general category; dividends/interest go here for passive category
• Part I, Line 3a-3d: Allocate deductions (standard deduction portion, foreign taxes, etc.)
• Part II, Line 1-8: Report foreign taxes by country wages in column (A), dividends in column (B), interest/royalties in column (C)
• Part III, Line 12-20: Apply the limitation formula (we covered this in the example section above)
• Part IV (summary form only): Combine all categories and flow to Schedule 3

Be accurate and consistent with exchange rates and income categorization.

Step 5: Attach Form 1116 to your tax return and submit

Once the form is complete, attach it to your Form 1040 or Form 1040-SR. Include all supporting documentation (Schedule B, Schedule C if applicable) and double-check for missing information or math errors.

You can e-file your return or mail it in, depending on your situation.

Step 6: Track carryovers and keep records

If you have unused foreign taxes, record them accurately by category and by year. Keep copies of Form 1116, your tax return, and all related documents for at least three years.

What triggers amendments/redeterminations:

• Foreign tax refunds or audit adjustments
• Currency exchange rate corrections
• Changes to your foreign or US tax return after filing

If any of these occur, you may need to file an amended return and attach Schedule C (Form 1116) to report the redetermination. For more on timing and reporting, see our guide on how to properly report timing of foreign income and taxes paid.

Even small errors on the form can trigger IRS scrutiny. If you have multiple sources of income or are unsure about the process, our tax professionals can help drop us a line.

Common mistakes to avoid

Even experienced expats make errors on Form 1116 that can delay refunds or trigger IRS audits. Here are the most common pitfalls:

• Not reporting all foreign income: Underreporting can result in penalties. Report all foreign income, whether tax was paid or not.
• Double benefits: Don’t claim both the foreign tax credit and foreign earned income exclusion on the same income; this triggers IRS correspondence.
• Incorrect exchange rates: Use IRS-published yearly average rates. Don’t use daily rates unless required.
• Failing to categorize income properly: Keep general and passive categories separate in Part I to avoid miscalculations.
• Using de minimis incorrectly: Passive income, 1099 reporting, and an election are all required. Missing any condition can disallow your credit.
• Wrong basket/category: Wages belong in general, dividends in passive. Misplacing income leads to incorrect calculations.
• Carryover mismatch by category: Unused credits must be applied to the same category in future years. Passive carryovers can’t offset general income.
• Foreign tax redeterminations: Report refunds or audit adjustments using Schedule C (Form 1116) to avoid penalties.
• Not tracking carryovers: IRS doesn’t track carryovers; keeping records is essential.
• Filing multiple categories on one form: Each category requires its own Form 1116; don’t combine passive and general income.

Filing Form 1116 feels overwhelming? We've got your back

When your income spans countries, currencies, and categories – Form 1116 can get complicated fast. But you don’t have to figure it out alone.

At Taxes for Expats, you’ll work one-on-one with a tax expert – not software, not templates. Just someone who knows the ins and outs of expat taxes and takes the time to understand your situation.

We’ll help you file your tax form correctly or recommend a better option if it means lowering your tax bill. Either way, we’ll make sure you’re paying what you owe, and not a dollar more.