What Is IRS Form 1116? A Guide To The Foreign Tax Credit

IRS Form 1116 helps many Americans reduce double taxation when they earn income overseas and pay taxes to another country.

According to the IRS, the foreign tax credit was created to reduce the double tax burden that can happen when both the United States and another country tax the same income.

The Foreign Tax Credit, also called the FTC, is a tax benefit that can help US expats lower or completely avoid US taxes on income earned while living and working in another country. 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 IRS 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 US taxpayers who paid or accrued qualifying foreign taxes to a foreign country on foreign source income and want to avoid double taxation.

If you've earned income from outside the US and 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 US tax liability, but the credit is limited by IRS rules.

What Is the Foreign Tax Credit?

Americans who pay income taxes to a foreign government may qualify for the foreign tax credit, which helps prevent double taxation. This credit can reduce the amount of US taxes owed by applying certain foreign income taxes directly to your federal tax liability.

The credit does not always erase your full US tax bill. The IRS limits how much foreign tax credit you can use based on your foreign source income, total taxable income, and US tax liability.

Who Can Claim the Foreign Tax Credit?

Taxpayers may qualify for the foreign tax credit if they paid or accrued eligible foreign taxes on income earned outside the United States. While the FTC is commonly used by Americans living and working abroad, it may also apply to other taxpayers with foreign source income.

The main criterion to be eligible to claim the FTC is that the tax must qualify under IRS rules. For example, the tax generally must be an income tax or a tax paid in place of an income tax. There are also other exceptions, such as taxes paid to certain countries with restricted status.

How Do You Claim the FTC?

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

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How Does the FTC Work?

Here is a simple Form 1116 example of how the foreign tax credit works:

1. You earn income while living and working in another country.
2. You pay taxes to that foreign country on your income.
3. You also file a US tax return.
4. You use the foreign tax credit to reduce your US taxes.

For example, imagine you earned $80,000 while working in Germany and paid $18,000 in German income taxes. If you would normally owe $15,000 in US taxes on that same income, the foreign tax credit may reduce your US tax bill to $0.

Any extra unused foreign taxes may carry over to future tax years if they meet IRS carryover rules. This is one reason the foreign tax credit can be so valuable for Americans living in higher tax countries.

IRS Form 1116 Requirements

There are strict Form 1116 requirements for claiming the foreign tax credit. The taxes must usually be qualifying income taxes paid or accrued to a foreign government on foreign source income, and you must keep records showing how much foreign income you earned and how much tax you paid. Some taxes, including most property taxes, sales taxes, and social security taxes paid overseas, generally qualify for the foreign tax credit.

What Are FTC Carryovers?

If you paid more qualifying foreign taxes than you can use in the current tax year, you may have an FTC carryover. In many cases, unused foreign tax credits can be carried back 1 year and carried forward for up to 10 years.

For example, if you build up extra credits while living in a high-tax country, you may be able to use them later if you move to a lower-tax country. The credits must still meet IRS income category and credit limit rules for the year.

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Should I Always Use the FTC, or Should I Claim the Foreign Earned Income Exclusion?

If you live and work abroad in a country with a higher tax rate than the US, you may be better off claiming the FTC. Claiming the FTC may also help you stay eligible for other US tax breaks, such as the child tax credit.

The foreign earned income exclusion is claimed on IRS Form 2555. Generally, if you live in a country with a lower or zero tax rate, then the FEIE may be the better option.

Some benefits of claiming the FTC over the FEIE include:

• If you switch from the FEIE to the FTC, you may not be able to claim the FEIE again for 5 years without IRS permission.
• Unused foreign tax credits may be carried back 1 year and forward for up to 10 years.
• If you claim the FEIE, you cannot use the Additional Child Tax Credit on excluded income. For 2025, the Child Tax Credit is worth up to $2,200 per qualifying child, with up to $1,700 refundable.

Can I Claim Both the FTC and the FEIE?

Yes, you can. However, you cannot claim an FTC on income that was excluded from US tax through the FEIE.

The FEIE limit for tax year 2025 is $130,000, while the 2026 limit increases to $132,900. Using both the FTC and the FEIE may help if you live in a lower tax country and earn more than the FEIE amount.

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Form 1116 Instructions

The official Form 1116 instructions explain how taxpayers should separate different types of foreign income into categories called baskets. These categories can include:

• Passive income
• General income
• Foreign branch income

Many filing mistakes happen because taxpayers combine different income types. That can create problems when calculating how much of the foreign tax credit can actually be used. Even small reporting mistakes can delay a tax return or trigger IRS questions.

What Counts As Passive Income?

Passive income usually includes dividends, interest, royalties, and some rental income. This category is often used by investors who own foreign stocks or overseas investment accounts.

What Counts As General Category Income?

General category income usually includes wages, salary, and self-employment income earned while working abroad. This is the most common category used by American expats. Many expats working overseas use this category when filing a foreign tax credit form because their income comes from employment rather than investments.

Records To Keep on File

It is important to keep foreign tax returns, bank records, pay statements, and exchange rate calculations. The IRS international taxpayer guide also recommends keeping copies of travel records and residency documents for expat tax filings.

Frequently Asked Questions

Can You File IRS Form 1116 Without Living Abroad?

Yes. You do not have to live outside the United States to use the foreign tax credit. Some taxpayers claim the credit because they paid foreign taxes on investments, dividends, royalties, or mutual funds that generated overseas income.

For example, some international stock funds report foreign taxes paid on Form 1099 DIV. In some situations, those taxes may qualify for the foreign tax credit even if the taxpayer never left the United States.

Can You Claim the Foreign Tax Credit Without Filing Form 1116?

Some taxpayers may qualify for a simplified exception that allows them to claim the credit without filing the full foreign tax credit form. This usually applies when:

1. All foreign source income is passive
2. All foreign taxes are reported on a payee statement
3. Qualified foreign taxes are not more than $300, or $600 for married taxpayers filing jointly

However, many expats and taxpayers with larger foreign tax amounts still need to complete IRS Form 1116 to properly calculate the credit. If you use this simplified election, you also cannot carry back or carry over unused foreign tax to or from that tax year.

What Happens If Foreign Taxes Change Later?

If another country later refunds part of your taxes or changes the amount owed, you may need to update your US tax return. The IRS calls this a foreign tax redetermination.

Can IRS Form 1116 Reduce Self-Employment Taxes?

No. The foreign tax credit generally reduces federal income taxes, but it usually does not reduce US self employment taxes. Many self-employed expats are surprised by this rule when they first move overseas. Some countries have totalization agreements with the United States that may help prevent double social security taxation.

Get Expert Help Filing IRS Form 1116 Online

IRS Form 1116 can help Americans abroad reduce or even eliminate double taxation, but the rules can become complicated very quickly. Understanding filing requirements is important for avoiding mistakes and protecting valuable tax credits.

Expatfile was built specifically for Americans abroad who want a faster and simpler way to file taxes correctly. The platform automatically helps determine the best tax strategy for your situation, tracks foreign tax credit carryovers, and simplifies complicated expat filing rules. Register online to get started with Expatfile now.

This article was reviewed by Prasanth, IRS Enrolled Agent

Updated: August 6, 2026