Form 1116: foreign tax credit

What Form 1116 is for

Form 1116 is used to claim a foreign tax credit for certain foreign taxes paid or accrued by an individual, estate, or trust. The instructions direct those filers to use it when the election to claim the credit without Form 1116 does not apply.^[1][2]

The instructions identify income, war profits, and excess profits taxes as potentially creditable, including qualifying taxes imposed by a foreign country's political subdivisions. They also include certain taxes imposed in place of a generally imposed income, war profits, or excess profits tax.^[2]

The credit generally cannot exceed the smaller of the U.S. tax allocated to the foreign income and the foreign tax paid or accrued after required reductions.^[2]

When the election without Form 1116 applies

An individual may claim the credit without Form 1116 only when all the instructions' election conditions are met. Estates and trusts cannot use this election.^[2]

• All foreign source gross income falls within passive category income for this election, which also includes high-taxed income and certain export financing interest.^[2]
• Qualified payee statements report all that income and the foreign taxes paid on it. Examples include Forms 1099-DIV and 1099-INT.^[2]
• Total creditable foreign taxes do not exceed $300, or $600 for a married couple filing jointly.^[2]

The election prevents foreign taxes from the election year being carried to another year, or foreign taxes from another year being carried into it. The general creditability rules and required tax reductions still apply.^[2]

How the instructions define income

Foreign source income generally includes pay for services performed outside the United States, interest from a payer outside the United States, and dividends from a corporation incorporated outside the United States.^[2]

The instructions call for a separate Form 1116 for each applicable income category. Passive income generally includes interest, dividends, rents, royalties, and annuities, subject to exceptions such as active business rents and royalties.^[2]

Foreign branch category income consists of U.S. persons' business profits attributable to qualified business units in foreign countries, excluding passive category income. General category income can include employee wages, salary, and overseas allowances.^[2]

Information and attachments

Parts I and II generally organize information by country or territory. The instructions assign each country a separate Part I column and Part II line, with extra sheets when taxes were paid to more than three countries or territories.^[2]

Line 1a asks for the income type and foreign income taxable by the United States, even when the foreign country does not tax it. Earned income excluded through Form 2555 is omitted.^[2]

Lines 2 through 5 account for deductions directly related to foreign income and an allocated share of other deductions. Part II generally asks for foreign taxes in both their foreign currency denomination and U.S. dollars.^[2]

Currency conversion requires an attached explanation of the exchange-rate calculation. For passive income taxes reported in U.S. dollars on Form 1099-DIV, Form 1099-INT, or a similar statement, conversion back into foreign currency is unnecessary.^[2]

Related forms and schedules

Schedule B reconciles foreign tax carryovers, while Schedule C reports foreign tax redeterminations relating to prior tax years. The instructions require Schedule B for each applicable category when a prior-year carryover is entered on line 10 or a carryover is generated.^[1][2]

Schedule K-3 information from a partnership or S corporation feeds into Form 1116 under the instructions' reporting rules. Form 8689 handles the credit calculation for taxes paid to the U.S. Virgin Islands.^[2]

For foreign earned income excluded on Form 2555, the line 12 instructions reduce creditable taxes by the amount attributable to that excluded income.^[2]

Timing stated in the instructions

The credit generally belongs to the tax year in which foreign taxes are paid or accrued, depending on the accounting method. A cash-basis taxpayer can elect accrual treatment on a timely original return, with that treatment continuing on future returns.^[2]

An election to claim a credit, including a change from deduction treatment, is subject to a special 10-year limitation period. An election to deduct, including a change from credit treatment, is subject to the standard 3-year period, with extensions by agreement described in the instructions.^[2]

Questions and answers

Related pages

• IRS forms: All form reference pages.
• FinCEN Report 114 (FBAR): foreign account reporting
• Form 1041: income tax return for estates and trusts
• Form 2555: foreign earned income exclusion
• Form 3520-A: annual information return of a foreign trust
• IRS form finder: Search the forms by keyword.