Foreign Tax Credit Explained: Form 1116, Credit vs Deduction
In this guide
Quick answer: The foreign tax credit lets you reduce your US tax by income tax you paid or accrued to a foreign country or US possession on the same income. Individuals claim it on Form 1116. You can take either the credit or an itemised deduction, and the IRS says the credit is usually to your advantage. You cannot claim it on income you exclude.
If you earn money abroad and the US also taxes you on it, you can end up paying twice. The foreign tax credit is the main way the US tax system reduces that. This guide covers what the IRS says about who can claim it, which taxes count, how it compares with a deduction and where it collides with the foreign earned income exclusion. It sits alongside our expat tax guide.
Who can claim the foreign tax credit?
You may claim it if you paid or accrued foreign taxes to a foreign country or US possession and you are subject to US tax on the same income. Individuals, estates and trusts use Form 1116. Corporations use Form 1118.
Which foreign taxes qualify?
The credit applies only to taxes imposed on you by a foreign country or US possession. Generally, only income, war profits and excess profits taxes qualify. The IRS credit page refers to a separate page for the details on what counts, so check it for borderline taxes. If a tax treaty lowers the rate, only the treaty-reduced tax qualifies and any excess is not creditable; see tax treaty benefits explained.
Should you take the credit or the deduction?
| Foreign tax credit | Itemised deduction | |
|---|---|---|
| What it reduces | Your US tax liability | Your US taxable income |
| Where you claim it | Form 1116 | Schedule A (Form 1040) |
| IRS view | “In most cases, it is to your advantage” | Available as the alternative |
You choose one or the other. A credit takes the foreign tax off your US bill directly; a deduction only lowers the income the US taxes.
What is the conflict with the foreign earned income exclusion?
You cannot claim a credit for taxes on income you exclude, such as foreign earned income or foreign housing costs. The IRS also warns that claiming the credit may cause one or both exclusion elections to be treated as revoked. Read our foreign earned income exclusion guide before deciding which to use, because switching can have lasting effects.
Other points the IRS highlights
- Foreign-source qualified dividends and capital gains taxed at reduced US rates must be adjusted on Form 1116, line 1a.
- Interest expense must be apportioned between US and foreign-source income.
- Charitable contributions are generally not apportioned, but contributions to charities in Mexico, Canada and Israel must be.
- After a foreign tax redetermination you generally must file Form 1040-X. Not notifying the IRS can bring a penalty.
- Since tax year 2021, Form 1116 includes a Schedule C to report redeterminations.
The IRS credit page does not give the limitation formula, carryover periods or other thresholds. It points to Publication 514 and “How To Figure The Credit”. We have left those details out rather than guess.
Common mistakes
- Claiming a credit and the earned income exclusion on the same income.
- Claiming foreign taxes that are not income taxes.
- Claiming more than the treaty rate when a treaty reduces the foreign tax.
- Forgetting to amend your return after a foreign tax changes.
Frequently asked questions
Do I need Form 1116 if I only pay a little foreign tax?
The IRS credit page does not state a minimum. Check the Form 1116 instructions for any simplified rule.
Can a foreign tax credit be claimed from an amended return?
The IRS page discusses amended returns for French CSG/CRDS taxes, with a general ten-year period to claim a refund for those taxes. It does not state a general period for all credits, so check the instructions.
Does the credit replace FBAR or Form 8938?
No. Those are reporting rules, covered in our FBAR and Form 8938 guides.
Key takeaways
- Use Form 1116 to claim a credit for foreign income taxes on income the US also taxes.
- Credit or deduction, not both; the IRS says the credit usually works out better.
- No credit on excluded income, and claiming it may revoke an exclusion election.
- Treaty-reduced tax only; the excess is not creditable.
Related guides
- Expat tax for US citizens abroad
- Foreign earned income exclusion
- US tax treaty benefits
- FBAR guide
- Your first 90 days in a new country
This page is general information, not legal or tax advice. Last updated: October 2026.
Sources
Internal Revenue Service: Foreign tax credit page.