Concise Takeaway
The Foreign Tax Credit allows taxpayers to reduce U.S. income tax when they pay or accrue foreign income taxes. The credit is nonrefundable and prevents double taxation on the same income.
Foreign Tax Credit Basics
A taxpayer who pays income tax to a foreign country may choose either:
- A nonrefundable credit against U.S. income tax, or
- An itemized deduction for foreign taxes paid
However, a taxpayer cannot claim a credit or deduction for foreign taxes paid on income that is excluded from U.S. tax under:
- Foreign earned income exclusion
- Foreign housing exclusion
- Puerto Rico income exclusion
- Possession exclusion
Form 1116 Requirement
Most taxpayers must file Form 1116 to claim the credit unless all of the following are true:
- All foreign income is passive income (e.g., interest, dividends)
- All income and foreign taxes were reported on a qualified payee statement
- Examples: Form 1099‑INT, Form 1099‑DIV, Schedule K‑1
- Total foreign taxes are below the threshold for simplified reporting
- The taxpayer elects the simplified procedure by entering the smaller of total foreign tax or regular tax on the Foreign Tax Credit line of Schedule 3
Foreign Tax Credit Flow Summary
- Identify foreign source income
- Determine whether income is excluded under FEIE or housing exclusion
- Confirm whether Form 1116 is required
- Calculate allowable credit
- Apply limitation rules
- Claim credit on Schedule 3 (with or without Form 1116)
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Meta Description
Summary of the Foreign Tax Credit, including eligibility rules, excluded income categories, Form 1116 requirements, passive income exceptions, qualified payee statements, and how taxpayers claim the nonrefundable credit to avoid double taxation.