What is HTKO (High Tax Kickout) and how is it different from HTE on Form 1116?

For 2025 individual returns filed in 2026, the foreign tax credit high tax kickout rule can move high-taxed passive foreign source income and its related creditable foreign taxes out of the passive category on Form 1116. The key individual threshold is 37%, the highest US income tax rate for 2025 – not 33.3%.

US citizens and resident aliens can be subject to US tax on worldwide income even while living abroad. The foreign tax credit helps reduce double taxation, but the credit is calculated separately for categories such as passive and general category income. HTKO taxes change which category is used for that calculation rather than creating a separate tax.

HTKO also differs from the high-tax exception, or HTE, used for certain controlled foreign corporation rules. For 2025, the CFC high-tax threshold is generally more than 18.9%, based on 90% of the 21% corporate rate, while individual Form 1116 HTKO uses the highest applicable individual rate of 37%.

What is HTKO? A plain-English definition for US expats

For the 2025 tax year, HTKO, or High Tax Kickout, removes qualifying high-taxed passive income from the passive basket used for the Foreign Tax Credit on Form 1116 when creditable foreign taxes exceed the highest US tax that can be imposed on that net income – 37% for individuals.

The following three points summarize what the HTKO foreign tax credit rule does:

• It starts with income that would otherwise be passive category income.
• It tests the creditable foreign tax against the highest applicable US rate after allocable expenses, losses, and deductions.
• If the group is high-taxed, the income and associated taxes move to the category required by the sourcing and look-through rules, commonly the general category for a straightforward individual case.

What does HTKO mean? It means “High Tax Kickout,” a mandatory Form 1116 classification rule rather than a taxpayer election. The 2025 Instructions for Form 1116 state that passive income is high-taxed when the foreign taxes paid on it, after expense allocation, exceed the highest US tax that can be imposed on that income.

How HTKO works: The core mechanics

The high tax kickout rule tests groups of passive foreign source income after allocating expenses, losses, deductions, and creditable foreign taxes. For a US individual filing a 2025 return, the governing comparison uses 37%, because that is the highest individual rate specified under section 1 for 2025.

The following four steps show how the test works:

1. Identify passive category income. Start with foreign-source income that would otherwise fall into the passive basket, then apply the IRS grouping rules before testing the tax rate.
2. Determine net income and related creditable foreign tax. Allocate the required expenses, losses, and deductions to the relevant group. Use only foreign income taxes that qualify for the Foreign Tax Credit.
3. Compare the tax with the 37% US ceiling. For an individual’s 2025 return, compare the creditable foreign tax allocated to the group with 37% of the group’s net foreign-source income.
4. Reclassify a high-taxed group. If the creditable foreign tax exceeds the highest US tax that could be imposed, the income and related taxes leave the passive basket and move to the category required under the regulations, frequently general category income for an individual.

HTKO applies when creditable foreign income taxes on a tested passive-income group exceed the highest US tax that can be imposed on that net income – 37% for a 2025 individual return.

HTKO is separate from choosing between the FTC and FEIE. Read our comparison of the Foreign Tax Credit and Foreign Earned Income Exclusion before deciding how foreign earned income will be treated on the return.

 

HTKO vs HTE: Key differences explained

HTKO and HTE address different parts of the international tax rules. For a 2025 individual return, HTKO tests otherwise-passive income against the 37% highest individual rate, while the CFC high-tax exception generally uses a threshold above 18.9%, equal to 90% of the 21% section 11 corporate rate.

The key distinction is that HTKO reclassifies high-taxed passive income between Foreign Tax Credit categories, while HTE can exclude qualifying CFC income from a current Subpart F or GILTI inclusion when the applicable election and foreign-tax test are satisfied.

 

The GILTI high tax kickout is therefore shorthand that can blur two separate rules. GILTI HTE is a CFC-level high-tax exception; individual HTKO is a section 904 Foreign Tax Credit classification rule.

HTKO on Form 1116: Where and how to report it

A Form 1116 HTKO adjustment is reported through “HTKO” columns, not by checking an HTKO box. For 2025, the IRS instructs taxpayers to enter “HTKO” on line i of both the passive-category Form 1116 and the Form 1116 for the category receiving the reclassified income.

The following three Form 1116 fields are central to the Form 1116 high tax kickout reporting:

• Line i and line 1a: Enter “HTKO” on line i. Show the reclassified income as a negative number in the HTKO column of the passive Form 1116 and as a positive number in the HTKO column of the receiving category.
• Line 6: Enter definitely related or apportioned deductions as a negative amount on the passive form and a positive amount on the destination-category form.
• Line 13: Move the related foreign taxes in the same direction – negative on the passive Form 1116 and positive on the receiving-category Form 1116.

What is high tax kickout on 1116? It is a reclassification procedure that moves qualifying high-taxed passive income, deductions, and related foreign taxes into the correct separate category while preserving the Foreign Tax Credit calculation.

Does “f HTKO” mean box f? No. On the 2025 Form 1116, box f is for “Certain Income Re-Sourced by Treaty.” HTKO is instead identified on line i and through the corresponding entries described above.

See our guide to reporting the timing of foreign income and foreign taxes when the foreign tax year or payment date differs from the US tax year.

 

Passive category income and why it triggers HTKO

HTKO begins with income that would otherwise fall in the passive category, which commonly includes interest, dividends, rents, and royalties. For a 2025 individual return, that income becomes high-taxed only when the qualifying foreign taxes allocated to its IRS-defined group exceed the highest applicable US tax – generally 37%.

The following four income types commonly enter the passive-category analysis:

• Dividends from foreign corporations or investments, subject to any applicable look-through or other category rules.
• Interest from foreign bank accounts, bonds, or similar investments.
• Rents from foreign real property when the income is passive under the applicable rules.
• Royalties that remain passive after applying the relevant active-business and look-through rules.

Understanding the difference between earned and unearned income matters because wages and other compensation for services are ordinarily general category income rather than passive category income. Foreign earned income may also interact with Form 2555, while passive income generally does not qualify for the Foreign Earned Income Exclusion.

A high foreign statutory rate alone does not settle the HTKO result. Expenses and losses allocated to the group can reduce its net income, while tax treaties, refunds, and creditability rules can reduce the amount of foreign tax used in the test.

HTKO can affect 2 Form 1116 categories. Get help preparing your US expat tax return.

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High Tax Kickout example: A step-by-step walkthrough

A high tax kickout example for 2025 should compare creditable foreign tax with 37% of net grouped passive income, not with a 33.3% threshold. If the resulting foreign tax exceeds that amount, the high-taxed income and associated tax move out of the passive category under Treas. Reg. § 1.904-4(c).

Based on our client scenario at TFX: assume a US expat in Germany has EUR 20,000 of net foreign-source rental income after allocable deductions and EUR 8,400 of creditable German income tax allocated to that tested group. Because both amounts use the same currency base for this rate comparison, the effective foreign tax rate is 42%.

The following four steps show the calculation:

1. Calculate the foreign effective rate: EUR 8,400 ÷ EUR 20,000 = 42%.
2. Identify the 2025 US comparison rate: the highest individual US income tax rate is 37%.
3. Apply the HTKO test: 42% exceeds 37%, so the group is high-taxed.
4. Reclassify the amounts: in this simplified individual fact pattern, the rental income and related creditable tax move from passive category income to general category income and are reflected through the corresponding HTKO entries on Form 1116.

For high tax kickout reporting on Form 1116, the rate comparison is only part of the work. The taxpayer must also allocate deductions and taxes correctly and track the category to which the amounts move.

Foreign assignments can produce both earned and investment income, so see our guide to foreign assignments and US expat taxes when compensation and passive income appear on the same return.

HTKO and GILTI: How the high-tax exception applies to controlled foreign corporations

GILTI HTE is a separate controlled foreign corporation rule, not the individual Form 1116 HTKO test. For a 2025 CFC inclusion year, a tentative tested income item can qualify for the high-tax exception when its effective foreign tax rate is greater than 18.9%, assuming the required election applies.

The 18.9% figure comes from 90% of the 21% maximum Section 11 corporate tax rate. It should not be substituted for the 37% individual threshold used to determine whether otherwise-passive income is high-taxed under Treas. Reg. § 1.904-4(c).

The following three differences keep the rules separate:

• Taxpayer level: individual HTKO operates within the section 904 Foreign Tax Credit baskets, while GILTI HTE applies to qualifying income of a controlled foreign corporation.
• Threshold: individual HTKO generally uses a 37% comparison for 2025 individuals; GILTI HTE uses a rate greater than 18.9%.
• Result: HTKO reclassifies income and taxes between FTC categories; a valid GILTI high-tax election can exclude qualifying tentative tested income items from the GILTI calculation.

Entity classification should be settled before applying CFC rules. A foreign disregarded entity is reported differently from a CFC, so US owners can review our Form 8858 and foreign disregarded entity guide when determining which international forms apply.

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Subpart F income and the High Tax Kickout rule

Subpart F uses its own high-tax exception under section 954(b)(4), rather than the individual Form 1116 HTKO rule. For a 2025 CFC year, a net item must face an effective foreign tax rate greater than 90% of the section 11 maximum rate, or more than 18.9% while that corporate rate is 21%.

The high tax kickout Subpart F can therefore be misleading if it suggests that the Form 1116 rule applies directly to the CFC. The Subpart F high-tax exception requires an election, while individual high tax kickout treatment under Treas. Reg. § 1.904-4(c) is not elective.

The following three election rules are especially relevant:

• The election is made by the controlling US shareholders and is binding on all US shareholders of that CFC.
• Eligible passive foreign personal holding company income must satisfy the regulation’s consistency rule – qualifying passive items are excluded in their entirety or remain subject to Subpart F in their entirety for the year.
• The CFC election should be analyzed separately from any later Form 1116 category and Foreign Tax Credit consequences at the US shareholder level.

A taxpayer with CFC income should model the CFC inclusion and the related foreign-tax consequences together rather than using the 37% individual HTKO threshold in place of the 18.9% CFC test.

When HTKO helps and when it hurts: Pros and cons

HTKO does not guarantee a larger or smaller Foreign Tax Credit. It changes the separate limitation category used for the income and related tax, so the result depends on the taxpayer’s general-category income, passive-category income, carryovers, and section 904 foreign tax credit limitation for 2025.

The following six practical effects include three potential advantages and three potential drawbacks:

Potential advantages

• High-taxed passive income and related taxes can move into a category with enough foreign-source taxable income to support a larger current-year credit.
• Reclassification keeps the income and associated tax in the same category, which prevents the tax from remaining in a passive basket after the income leaves it.
• The result can reduce unused passive-category tax when the taxpayer’s other category facts support use of the reclassified credit.

Potential drawbacks

• Moving tax into the general category can create unused general-category foreign tax if the general basket has a low section 904 limitation.
• Existing passive-category carryovers cannot simply be moved to another category because current-year income is reclassified.
• More than one Form 1116 and a separate Schedule B carryover record may be required, increasing the reporting work.

The tax rate differential alone does not show whether the final US result is favorable. If investment income is also subject to the 3.8% Net Investment Income Tax, see our Net Investment Income Tax guide for that separate calculation.

How to prevent High Tax Kickout treatment

You cannot simply elect out of individual HTKO once the regulatory test is met. To prevent high tax kickout treatment legitimately, the 2025 facts must produce a group that is not high-taxed – for example, because the correct net income, creditable tax, grouping, or treaty entitlement keeps the tax at or below the applicable 37% test.

The following three checks can prevent an incorrect HTKO classification:

1. Calculate net grouped income correctly. Allocate expenses, losses, and deductions before comparing the foreign tax with the highest US tax rate. Testing a gross payment can produce the wrong result.
2. Use only legal and actual foreign tax liability. If a treaty, foreign-law refund, or reduced withholding rate means part of the tax is refundable or was not legally owed, that excess is not a qualified foreign tax for the credit. The IRS reiterated this rule in 2026.
3. Separate individual HTKO from CFC high-tax elections. A valid GILTI or Subpart F HTE can change a CFC inclusion, but it is not an election to turn off HTKO for unrelated passive income reported directly by an individual.

Tax treaties can make the second check especially important. Review the forms used to obtain reduced rates in our guide to foreign withholding forms before treating the full amount withheld as creditable foreign tax.

 

Taxes reclassified under High Tax Kickout: What happens to your credits

When HTKO applies, the income and its associated foreign taxes move together into the appropriate destination category. For a 2025 individual return, this means taxes reclassified under High Tax Kickout no longer support the passive-category limitation and instead enter the section 904 calculation for the receiving category.

The key rule is that HTKO reclassifies both the high-taxed income and the foreign taxes imposed on that income, so the tax follows the same separate limitation category as the reclassified income.

The following three consequences affect the credit calculation:

• The passive-category foreign-source income used in the limitation is reduced by the reclassified amount.
• The related foreign tax is removed from the passive basket and assigned to the receiving category.
• Any resulting excess foreign taxes are tracked within their resulting separate limitation categories rather than pooled across all foreign income.

With a high tax kick-out, foreign tax credit treatment still depends on where the underlying income belongs after the section 904 rules are applied. See our guide on where to report foreign income on Form 1040 for the broader return-reporting framework.

HTKO and foreign dividend income: A special case

Foreign dividends can enter the HTKO test when they are passive category income, but a 35% foreign withholding tax does not automatically trigger HTKO on a 2025 individual return because 35% is below the 37% highest individual rate. The actual test uses the creditable tax and net income of the appropriate IRS group.

The following three rules matter for foreign dividend income:

• Creditable tax matters more than the stated withholding rate. A foreign withholding tax above 37% can support HTKO only to the extent it represents qualifying, legally owed tax and the resulting grouped calculation passes the high-tax test.
• HTKO does not itself determine qualified-dividend status. Form 1116 has separate adjustments for foreign-source qualified dividends, including 0.4054 and 0.5405 adjustment factors in specified 2025 cases.
• Treaty limits must be checked. A tax treaty can provide a reduced dividend withholding rate, and tax eligible for a refund generally is not creditable merely because it was withheld.

Green card holders living abroad are also subject to US worldwide-income rules while they remain US tax residents. Our guide to green card holders and foreign income explains the broader filing treatment.

HTKO grouping rules: How the IRS requires you to categorize income

The high tax kick out rules do not permit taxpayers to average every passive item together. Treas. Reg. § 1.904-4(c) creates specific groups before the high-tax test, including four ordinary passive groups based on whether withholding is at least 15%, below 15%, zero with no other tax, or zero with another foreign tax.

The following three grouping principles control much of the analysis:

1. Ordinary passive income is grouped by foreign-tax treatment. The regulation separates passive income subject to withholding of at least 15%, withholding above zero but below 15%, no withholding or other foreign tax, and no withholding but another foreign tax.
2. CFC, 10%-owned foreign corporation, tested-unit, and foreign QBU items can require separate grouping. Look-through rules are applied before determining how dividends, inclusions, and other passive amounts are grouped.
3. Certain rents, royalties, and partnership items receive special treatment. A rent or royalty item with a directly allocable rent or royalty expense is treated as a single item and is not grouped with other amounts.

HTKO therefore tests the IRS-defined group, not an arbitrary average of unrelated passive investments or countries.

PFIC rules require another layer of care. A PFIC foreign tax credit issue can involve Form 8621 and section 1291 rules, so a PFIC tax calculation should not be folded into an ordinary HTKO grouping without checking the applicable PFIC regime.

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HTKO vs excess foreign tax credits: Understanding the interaction

Reclassification determines which category owns any unused foreign tax after the 2025 limitation is calculated. Excess foreign tax in an eligible category can generally be carried back 1 year and forward 10 years, but section 951A category taxes do not receive those carrybacks or carryovers under the 2025 Form 1116 instructions.

The following two carryover periods apply to eligible excess foreign tax credits:

• Carryback: apply qualifying unused foreign tax to the preceding tax year first.
• Carryforward: after the carryback, unused tax can generally move forward for up to 10 years.

HTKO can therefore affect more than the current-year credit. If tax moves from passive to general category income, the resulting unused amount is tracked in the general basket rather than retained as a passive-category carryover.

Foreign tax payment and return dates also differ by country. See our overview of foreign-country tax filing deadlines when determining when a foreign liability was paid or accrued for US Foreign Tax Credit purposes.

Common HTKO mistakes US expats make (and how to avoid them)

The most damaging HTKO errors usually come from using the wrong threshold, grouping income incorrectly, or reporting only one side of the reclassification. For 2025, the individual comparison rate is 37%, and a completed reclassification can affect line i, line 1a, line 6, line 13, and later category-specific carryover records.

The following four mistakes can produce an incorrect Form 1116:

• Looking for an HTKO checkbox. The 2025 instructions require “HTKO” on line i and corresponding positive and negative entries. Box F is for certain income re-sourced by treaty.
• Averaging passive income incorrectly. Apply the grouping rules in Treas. Reg. § 1.904-4(c) instead of combining every passive item into one taxpayer-created pool.
• Using the 18.9% CFC threshold for an individual HTKO calculation. The 18.9% threshold belongs to the GILTI and Subpart F high-tax exception rules; the individual 2025 HTKO comparison generally uses 37%.
• Losing track of reclassified carryovers. Schedule B for Form 1116 tracks unused foreign taxes by category, so general-category and passive-category carryovers must remain separate.

A high tax kick out Form 1116 entry should reconcile the income, deductions, and related taxes across both affected categories. If an HTKO problem is discovered while addressing a late return, review our guide to late US tax returns and penalties separately because late-filing rules are distinct from HTKO.

HTKO can shift income and tax across 2 Form 1116 categories. Get filing guidance.

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