Form 1116 – The Foreign Tax Credit

Pinpoints illustration for Expatfile
Pinpoints illustration for Expatfile
6 min. read

The foreign tax credit, or FTC, is one of the tax breaks available for US expats to eliminate or reduce any US tax liability on income earned from living and working abroad. This article gives you an overview of what the FTC is, who can claim it, and how you can claim it with Form 1116.

Do I need to file form 1116?

Whether you need to file Form 1116 depends on your specific tax situation. Form 1116, the Foreign Tax Credit form, is designed for U.S. taxpayers who have paid or accrued foreign taxes to a foreign country on foreign sourced income and wish to avoid double taxation. If you've earned income from outside the U.S. and have paid taxes on that income to another country, you might be eligible to claim the foreign tax credit. This form allows you to potentially reduce your U.S. tax liability.

What is the Foreign Tax Credit?

The foreign tax credit is a non-refundable credit that will reduce your US tax liability dollar-for-dollar for taxes you paid to a foreign country. Simply put, if you paid taxes to a foreign country, you can claim these foreign taxes as a credit against your US taxes. If you paid more taxes to a foreign country, than usually you will owe no US tax on that income.

Who can claim the Foreign Tax Credit?

Anybody can claim the foreign tax credit! The FTC is not just available for US expats who live and work abroad. The main criteria to be eligible to claim the FTC is that you paid taxes to a foreign government. However, it is frequently used by US expats who live and work abroad.

There are other little exceptions, like the tax should have not paid to a government that is designated as supporting terrorism, but most US expats don’t have to worry about the exceptions to the exceptions, especially when you use Expatfile to claim the FTC because we figure it all out for you!

How do you claim the FTC?

To claim the FTC, you need to file Form 1116 and attach this to your filed expat tax return.

Form 1116 can be complicated to an expat that is starting from scratch – so we built Expatfile to immediately determine and fill out Form 1116 for you! Answer a few questions and Expatfile’s expat tax software does the rest.

How does the FTC work?

Here’s a simplified example of how the FTC works:

  • You’re filing your 2019 US federal tax return and your filing status is “single”.
  • You earned foreign wages of $120,000 while living and working in the Netherlands.
  • Let’s assume you would owe $40,000 in US federal taxes on this income.
  • On your foreign wages, you actually paid $50,000 in Dutch taxes.

Since you paid $50,000 in Dutch taxes, you can use up to $40,000 of this as a foreign tax credit, bringing your US federal tax bill from $40,000 down to $0. In addition, the $10,000 in excess Dutch taxes can be carried forward to the next year, offsetting any US federal taxes owed on foreign income in the next year!

What are FTC carryovers?

If you paid more foreign taxes than what you would have owed in US taxes, then you have what we call a FTC carryover. A FTC carryover allows you to use that additional FTC to first (i) carryback and amend a prior year tax return to use the excess credits, and then (ii) to carryforward those excess credits to future years.

For example, a great example of building up FTC carryovers is when a US expat moves from a high tax country (for example Belgium) to a low-tax country (for example the United Arab Emirates). The excess tax paid to Belgium can be used as a FTC to offset any US tax income in the United Arab Emirates.

Does it sound complicated? Well it is, so we built Expatfile to determine and keep track of all your FTC carryovers so you don’t have to.

Should I always use the FTC, or should I claim the foreign earned income exclusion (the FEIE)?

If you live and work abroad in a country where the foreign tax rate is higher than the US federal tax rate, then you are usually better off by claiming the FTC. Claiming the FTC is a much more simple process than claiming the FEIE, and it also opens you up to other tax breaks in the US like the child tax credit.

Generally, if you live in a country where the foreign tax rate is lower (or zero) than the US federal tax rate, then you are usually better off by claiming the FEIE.

Some benefits of claiming the FTC over the FEIE include:

  • If you claim the FEIE in a given year and you want to switch to FTC in a future year, you may not be able to claim the FEIE for 5 years unless you receive special persmissiom from the IRS to do so.
  • If you paid more foreign taxes than US federal taxes, you can carry forward these as a credit to future years.
  • If you claim the FEIE, you cannot claim the Additional Child Tax Credit (a refundable tax credit of up to $2,000 per child per year). If you claim the FTC, you are allowed to take this credit.

Can I claim both the FTC and the FEIE?

Yes, you can. The main limitation to claiming both the FTC and the FEIE is that you can’t claim a FTC on income that you excluded from US tax by claiming the FEIE.

In other words, the FEIE limitation in 2019 is $105,900 – if you take this full exclusion than you will not be able to claim a FTC on the amount of this exclusion. Using both the FTC and the FEIE really only comes in handy when you are living in a country that has a lower tax rate than the US and you earned more than the FEIE amount of $105,900.

Check out our article that explains why it’s often better to claim the FTC than the FEIE.

Does it sound complicated? Well it is, and that’s why we built Expatfile to immediately determine and suggest the best tax breaks for your situation. You literally just answer a few straight forward question and our algorithm does the rest of the work for you, saving you the most tax and most importantly, saving you valuable time! Check out our features and pricing!

Updated April 28th, 2024