IRS Form 1116 – Foreign Tax Credit – If you’re a U.S. taxpayer with income from overseas, you might be paying taxes twice—once to a foreign government and again to the IRS. That’s where the Foreign Tax Credit (FTC) comes in, helping you avoid double taxation by offsetting your U.S. tax liability with taxes already paid abroad. IRS Form 1116 is the key document for claiming this credit, and understanding it can save you significant money on your 2025 tax return. In this comprehensive guide, we’ll break down everything you need to know about Form 1116, including eligibility, how to fill it out, and recent updates.
What Is the Foreign Tax Credit and Why Use Form 1116?
The Foreign Tax Credit allows U.S. individuals, estates, or trusts to reduce their U.S. tax bill dollar-for-dollar based on qualifying foreign income taxes paid or accrued. This credit applies to taxes on foreign-sourced income, such as dividends, interest, rents, or wages earned abroad. Unlike a deduction, which only reduces your taxable income, the FTC directly lowers your tax liability, making it often more advantageous.
Form 1116, titled “Foreign Tax Credit (Individual, Estate, or Trust),” is required for most taxpayers claiming the FTC. It’s attached to your Form 1040, 1040-SR, 1040-NR, 1041, or 990-T. You must file a separate Form 1116 for each category of foreign income, such as passive (e.g., interest and dividends), general (e.g., wages), or section 951A (global intangible low-taxed income, or GILTI). This ensures the credit is calculated accurately per income type.
Who Needs to File Form 1116? Eligibility Requirements?
To qualify for the FTC using Form 1116, you must meet these criteria:
- Be a U.S. citizen, resident alien, estate, or trust: Nonresident aliens generally can’t claim it, except in specific cases like Puerto Rico residents or those with U.S.-connected foreign income.
- Pay or accrue qualifying foreign taxes: These include income, war profits, or excess profits taxes (or taxes in lieu thereof) imposed by a foreign country or U.S. possession. Taxes must be legally owed, not refundable, and not subsidized.
- Have foreign-sourced income: The taxes must relate to income that’s also taxable in the U.S.
- Not excluded under other rules: For example, no credit for taxes on income excluded via the Foreign Earned Income Exclusion (Form 2555) or from sanctioned countries like those under section 901(j).
If your foreign taxes are $300 or less ($600 for married filing jointly) and all from passive income reported on qualified statements like Form 1099-DIV, you can claim the credit directly on Form 1040 without Form 1116. Estates and trusts don’t qualify for this simplified election.
Step-by-Step Guide to Filling Out Form 1116
Form 1116 has four parts. Use U.S. dollars for most entries, converting foreign currency at the appropriate exchange rate (e.g., payment date for cash basis or average annual for accrual). If taxes were paid to multiple countries, use separate columns (A, B, C) in Parts I and II.
Part I: Taxable Income or Loss From Sources Outside the United States
This section calculates your foreign-source taxable income.
- Line i: Enter the foreign country or U.S. territory (e.g., “France”). Use “863(b)” for certain multi-source income or “909 income” for splitting events.
- Line 1a: Gross foreign income of the category (e.g., dividends). Check the box if it’s employee compensation over $250,000 with an alternative sourcing basis.
- Lines 2-6: Deduct expenses. Line 2 for directly related deductions; Lines 3a-3g for pro rata share of other deductions (e.g., itemized or standard deduction); Line 4 for interest expense; Line 5 for foreign losses.
- Line 7: Net foreign-source income (Line 1a minus Line 6). Carry to Line 15 in Part III.
Part II: Foreign Taxes Paid or Accrued
Report taxes by country.
- Check “Paid” or “Accrued” basis.
- Columns (m)-(p): Taxes in foreign currency (dividends, rents/royalties, interest, other).
- Columns (q)-(u): Convert to U.S. dollars and total.
- Line 8: Total taxes; carry to Line 9 in Part III.
Part III: Figuring the Credit
Compute the allowable credit.
- Lines 9-14: Total available taxes after carryovers (Line 10 from Schedule B), reductions (Line 12, e.g., for excluded income or boycotts), and adjustments (Line 13 for high-tax kickout).
- Lines 15-17: Adjusted foreign-source income.
- Lines 18-23: Limitation calculation: (Foreign income / Total income) × U.S. tax liability, plus any section 960(c) increase.
- Line 24: Smaller of available taxes or limitation.
Part IV: Summary of Credits From Separate Parts III
Sum credits from all Forms 1116 by category (Lines 25-31). Reduce for boycotts (Line 34). Line 35 is your total FTC.
Attach supporting statements for complex items like deductions or alternative sourcing.
Key Calculations and Limitations for the Foreign Tax Credit
The FTC is limited to the U.S. tax on your foreign-source income to prevent crediting more than you’d owe domestically. Formula: (Foreign-source taxable income / Total taxable income) × U.S. tax liability.
- Adjustments: For qualified dividends or capital gains, use worksheets to account for preferential rates (e.g., multiply long-term gains by 0.4054 for 15% rate).
- Carryovers: Excess credit carries back 1 year and forward 10 years (use Schedule B). No carryovers for section 951A income.
- Redeterminations: If foreign taxes change (e.g., refund), file Schedule C and amend your return.
- Other Limits: No credit for taxes on excluded income, sanctioned countries, or certain penalties. Apportion taxes if they relate to multiple categories.
Recent Changes and Updates for the 2025 Tax Year
For 2025, key updates include:
- A new $6,000 senior deduction (for tax years 2025-2028) under P.L. 119-21, which is removed from taxable income for FTC computations.
- Disallowance of 10% of taxes on section 951A-excluded amounts after June 28, 2025.
- Part IV must be completed even if filing only one Form 1116.
- Continued relief for partnerships under Notices 2023-55/80, allowing prior creditability rules with modifications.
Always check IRS.gov for the latest, as legislation can impact rules.
Common FAQs About IRS Form 1116
1. Can I claim the FTC if I use the Foreign Earned Income Exclusion?
Yes, but only on non-excluded income. Reduce eligible taxes proportionally.
2. What if I paid taxes to sanctioned countries?
No credit allowed; report as section 901(j) income on a separate Form 1116.
3. How do I handle currency conversion?
Use the exchange rate on the payment date for cash basis or average annual for accrual, with exceptions for inflationary currencies.
4. Is the FTC refundable?
No, it’s non-refundable but can reduce your tax to zero and carry over excesses.
How to File Form 1116 and Where to Get It?
File Form 1116 with your tax return by the due date (April 15, 2026, for most). Download the latest version from the IRS website: https://www.irs.gov/pub/irs-pdf/f1116.pdf. For instructions, visit https://www.irs.gov/instructions/i1116. Consult a tax professional for complex situations, like carryovers or multiple income categories.
By properly using Form 1116, you can minimize your tax burden on foreign income. Stay compliant and maximize your credit—your wallet will thank you.