Foreign tax credit

The Foreign Tax Credit (FTC) lets you offset your US tax bill dollar-for-dollar with income tax you've already paid to a foreign government on the same foreign-source income. It's claimed on Form 1116 and covers nearly every income type — wages, self-employment income, dividends, interest, rental income, and capital gains — not just earned income. The credit is capped at the amount of US tax attributable to that foreign income, so it eliminates double taxation without ever creating a refund on its own.

The Foreign Tax Credit reduces your US tax by the amount of foreign tax you paid, while the Foreign Earned Income Exclusion (FEIE) removes a chunk of your foreign wages from US taxation entirely, up to $130,000 for 2025. The FEIE only applies to earned income and requires passing a bona fide residence or physical presence test; the FTC has no such residency test and applies to nearly any foreign-source income, provided you actually paid foreign tax on it. You can use either one, or combine them on different income, but not both on the exact same dollar of income.

Most filers claim the Foreign Tax Credit by completing Form 1116 for each relevant income category and carrying the result to Schedule 3, which then flows into Form 1040. Form 1116 is where you calculate the credit limitation — essentially, how much of your foreign tax is actually usable this year — separately for categories like general income and passive income, since credits can't be mixed across categories. A narrow exception lets some filers with only small amounts of passive foreign tax skip Form 1116 entirely and claim the credit directly.

Form 1116 calculates the Foreign Tax Credit limitation — the maximum credit you're allowed for foreign tax paid in a given income category — so you never credit more than the US tax that would otherwise apply to that foreign-source income. You generally need a separate Form 1116 calculation for each category of income (for example, general category wages versus passive category dividends), because excess credit in one category can't offset US tax owed on income in another. It's also the form that tracks any unused credit you're carrying back or forward from other years.

Yes — you just can't apply both to the exact same dollar of income. A common combination is excluding earned income up to the $130,000 (2025) FEIE cap, then claiming the Foreign Tax Credit for foreign tax paid on any earned income above that cap, plus on separate income types the FEIE never touches, like foreign investment income such as dividends, interest, or rental income. Coordinating the two properly can meaningfully reduce your total tax compared to relying on just one.

It mostly comes down to the tax rate where you live: the Foreign Tax Credit tends to come out ahead in higher-tax countries, while the FEIE tends to win in low- or no-tax countries. In a high-tax country, the foreign tax you've already paid often fully offsets your US tax through the FTC, with credit left over to carry forward; in a zero-tax jurisdiction, there's no foreign tax to credit, so the FEIE's straightforward exclusion does more work. The FTC also preserves eligibility for the refundable Additional Child Tax Credit and allows unused credit to carry forward 10 years, both of which the FEIE gives up — see the full FEIE vs. FTC comparison for the complete picture.

Run the numbers for your specific situation before deciding, because switching away from the FEIE carries a real lock-in risk: if you revoke it, the IRS generally won't let you re-elect it for 5 tax years without special approval. Beyond the immediate tax comparison, factor in whether you have kids (the FTC preserves the refundable Child Tax Credit, the FEIE doesn't), whether your income is mostly earned or passive (the FEIE only covers earned income), and whether your host country's tax rate is likely to stay low or rise. See the FEIE vs. FTC breakdown for a side-by-side comparison before locking in a choice you can't easily reverse.

No — eligibility for both benefits depends on residency and income facts, not on how many citizenships you hold. The FEIE requires passing the bona fide residence or physical presence test, and the Foreign Tax Credit simply requires that you paid foreign tax on foreign-source income; neither test asks about citizenship. Being a dual citizen does add a second country's tax rules to navigate, but it doesn't change how the IRS evaluates either the FEIE or the FTC on your US return.

The Foreign Tax Credit is reported on Schedule 3, Line 1, and that amount then flows into the total credits reported on Form 1040. The Schedule 3 figure is the output of Form 1116 (or, if you qualify for the small-credit exception, is taken directly from your foreign tax documentation). If you're not sure which schedule a specific credit or form feeds into, the complete guide to US tax forms for expats maps out how everything connects to the 1040.

No — the Foreign Tax Credit can only reduce your US tax liability to zero; it can't generate a refund beyond taxes you've actually paid. If your foreign tax paid exceeds the limitation for the year, the excess isn't lost — it can be carried back one year or forward up to ten years and applied against US tax in those years instead. See the full carryover and carryback rules for how to track and use unused credit over time.

Yes, if you qualify for the IRS's small-credit exception: your total qualified foreign tax for the year is $300 or less ($600 on a joint return), all of your foreign income is passive (like dividends or interest) and reported on a payee statement such as a 1099-DIV, and you elect this treatment for the year. Meet those conditions and you can claim the credit directly on Schedule 3 without the full Form 1116 calculation — useful for investors with modest foreign withholding tax on brokerage income. Once your foreign tax exceeds those thresholds, Form 1116 becomes mandatory.

The credit is the smaller of the foreign tax you actually paid or the FTC limitation, which is your US tax before credits multiplied by the ratio of foreign-source taxable income to total taxable income, calculated separately for each income category. In practice, that means high foreign tax paid on a small slice of income won't all be usable in one year — the limitation formula caps how much applies, with the rest available to carry back or forward. See the full FTC limitation and carryover mechanics for a worked example.

Nonrefundable — which matters most if you've already reduced your US tax to near zero another way, since a nonrefundable credit has nothing left to offset. This is why claiming the Foreign Earned Income Exclusion on the same income you're trying to credit doesn't help: once income is excluded, there's often little or no US tax remaining for the credit to reduce. The FTC vs. itemized deduction comparison covers the alternative of deducting foreign tax instead, which comes with its own tradeoffs.