US citizens and resident aliens filing Form 1040 are required to pay taxes on their worldwide income. US citizens living abroad are required to pay US taxes regardless of income source. Form 1116 is used to avoid double taxation by providing the taxpayer a dollar-for-dollar credit to be applied against taxes owed.
The foreign tax credit can be claimed for tax paid to a foreign country on income that is also taxed by the United States, including income tax, war profits tax, excess profits tax, and taxes in lieu of income tax. Taxes paid to a foreign country, a political subdivision of a foreign country, Puerto Rico, and American Samoa qualify. The credit is lesser of foreign tax paid or U.S. tax allocated to foreign source income.
For a foreign tax to qualify for the credit, it must meet these four tests:
- It is an income tax or a tax imposed in lieu of an income tax.
- It is the legal and actual foreign tax liability.
- It was imposed on the taxpayer.
- It was paid or accrued by the taxpayer.
The taxpayer cannot take a credit for taxes paid that they don't legally owe, including taxes where it is reasonably certain that the amount will be refunded, credited, rebated, abated, or forgiven. Thus, the amount of tax to enter on the form is the lesser of the amount they paid or the amount they legally owe by treaty, if there is a treaty with the source country and if it contains a provision as to the tax rate for the source income.
Before completing Form 1116, check to see if the US has a tax treaty with the source country. If there is a tax treaty, read it to determine its tax rate for the particular source income so that you can determine the allowable amount of tax to be credited. See here for the countries with whom the US has tax treaties.
If the taxpayer paid more to the source country than they legally owed, they may have to file a tax return in the source country to recover the difference.
Any foreign taxes claimed on Form 1116 cannot also be deducted on Schedule A, and vice-versa. Also, don't use Form 1116 to calculate credit for taxes paid to the US Virgin Islands. Instead, use Form 8689, Allocation of Individual Income Tax to the U.S. Virgin Islands.
On Form 1116, all income and taxes are reported in US dollars except where specified otherwise in Part II. When converting to US dollars, use the conversion rate in effect on the day when foreign taxes were paid or withheld. See here for more information about foreign currency conversion.
Form AMT 1116
Form AMT 1116 is a version of Form 1116 used for the AMT calculation. If a return is subject to AMT, the form is produced automatically using the information in Form 1116. It can also be directly edited if necessary for the AMT calculation. (Its menu includes a delete command, but if the return is subject to AMT the form cannot be deleted, and attempting to do so has the effect of refreshing it.)
In the individual tax return (Form 1040) in TaxSlayer Pro, the AMT 1116 menu is here:
- 2021 and forward: Tax Computation
2020 and prior: Other Taxes
- Alternative Minimum Tax (6251)
- Alternative Minimum Tax Foreign Tax Credit
Election to claim the Foreign Tax Credit without filing Form 1116
A taxpayer may claim the foreign tax credit without filing Form 1116 if all of the following are true:
- All foreign source gross income is passive income. For the purposes of the foreign tax credit, passive income includes interest, dividends, royalties, rents, and annuities. Capital gains not related to the active content of a trade or business are also generally passive income.
- All the income and any foreign taxes paid on the income were reported to the taxpayer on a qualified payee statement such as Form 1099-DIV, Form 1099-INT, Schedule K-1, or similar substitute statements.
- The total creditable foreign taxes paid are not more than $300 ($600 for Married Filing Jointly).
If the taxpayer makes this election, any unused credit cannot be carried forward and prior year unused credit cannot be included, and you will enter the credit amount directly on the Foreign Tax Credit line of Schedule 3 (Form 1040).
To make this election in TaxSlayer Pro, from the Main Menu of the tax return (Form 1040) select:
- Foreign Tax Credit (1116)
- Foreign Tax Credit Not More than $300 / $600 - Enter the amount of the credit. The credit will be limited $600 for MFJ filing status, $300 for all others.
Election to claim the Foreign Tax Credit using Form 1116
When completing the form, certain entries require a description of the amount being entered. The menu for these lines displays a blue button to the right of the dollar amount field:
To get a dollar amount in this field, click the blue button and enter both a description and an amount. The description and amount for each entry will print on a supporting statement.
To complete Form 1116 in TaxSlayer ProWeb from the Federal Section of the tax return (Form 1040) select:
- Credits Menu
- Foreign Tax Credit - Click the blue GO TO FORM 1116 button.
- Select the category to which the income belongs, then complete the information for that category as follows:
- Country of Residence - Select the taxpayer's resident country in the drop down menu.
- Are you reporting income that passed through a mutual fund or other regulated investment company (RIC) on a country-by-country basis? - Income from a foreign RIC does not need to be reported on a country-by-country basis. Check this box if you are reporting income from a RIC. After doing so, "RIC" will be indicated as the "country" in Column A on the form.
- Do you have passive income that is treated as general category income because it is highly taxed? - This question only has relevance to passive category income. Passive income doesn't include "high-taxed income", and income is deemed high-taxed if the the foreign taxes paid on the income (after allocation of expenses) exceeds the highest US tax that can be imposed on the income. Check this box if this applies. If checked, "HTKO" will be indicated as the "country" in Column A, and you will enter the income on the passive category form as a negative number and create an identical general category form with the income entered as a positive number and this check box also checked.
- Carryback or Carryover - If there is an unused credit amount being carried forward or back to this year, select the blue button and enter a description and the amount.
- Reduction in Foreign Taxes - There are a number of reasons why foreign taxes might be reduced. See the Form 1116 instructions for more information if any of these apply.
- Taxes on income excluded on Form 2555.
- Taxes on income from Puerto Rico that isn't taxable in the US.
- Taxes on income from American Samoa excluded on Form 4563.
- Taxes on combined foreign oil and gas income.
- Taxes on foreign mineral income.
- 10% reduction of all foreign taxes for failure to file Form 5471 if it is required.
- 10% reduction of all foreign taxes for failure to file Form 8865 if it is required.
- Reduction of taxes related to boycott operations.
- Taxes related to a foreign tax credit splitting event.
- Adjustments - There are a number of reasons why the taxable foreign income or loss might be adjusted. See the Form 1116 instructions for more information if any of these apply.
- Adjustment for disallowed business loss under section 461(l).
- Allocation of foreign losses (necessary if you have more than one Form 1116 and at least one of them indicates a loss on Line 15).
- Allocation of U.S. losses (net US-source loss needs to be allocated to each foreign income category).
- Recapture of prior year overall foreign loss accounts.
- Recapture of separate limitation loss accounts.
- Recapture of overall domestic loss accounts.
- Reduction of credit for international boycott operations - The amount entered here is from Schedule A (Form 5713), a form that will need to be completed outside of ProWeb and attached to the return. The amount entered here flows to Form 1116 Part III Line 34. Enter an amount here if the taxpayer is filing Form 5713 and can't determine the amount of tax specifically attributable to boycott operations. Don't enter the amount here if you only have one category of income; enter it on the reduction line.
- Type of income - Describe the income, e.g., "wages" or "dividends" (20 characters max).
- Credit is claimed for taxes paid or accrued - Click one of these buttons.
- Click Continue when finished to move to the final entry window.
- Foreign Country or U.S. Possession - Unless RIC or HTKO are already indicated, use the drop down menu to select the country or US possession from which the income was received.
- Enter the qualified dividends, capital gains, and gross income in the fields provided. Note that gross income does not include earned income excluded on Form 2555 but includes gross receipts less cost of goods sold, plus all other gross income, and all related to the category of income for this form.
- Expenses Directly Allocable to Income - Enter any expenses that definitely relate to the gross income entered in the previous field.
- Other Deductions - Enter any other deductions that don't definitely relate to any specific type of income, e.g., from Schedule 1 Part II.
- Gross income from sources within the country... - This field corresponds to Form 1116 Line 3d. Enter here gross income including earned income that was excluded on Form 2555 but not including any other exempt income, all related to the category of income for this form.
- Home mortgage interest - Use the Worksheet for Home Mortgage Interest in the Form 1116 instructions here to determine the amount to enter in this field.
- Other interest expense - See the Form 1116 instructions here to determine the amount to enter in this field.
- Losses from foreign sources - See the Form 1116 instructions here to determine the amount to enter in this field.
- Date paid or accrued - Enter the date the foreign taxes were paid or accrued.
- Foreign taxes paid or accrued in foreign currency - Select the blue button for the appropriate source of tax, whether withholdings on dividends, rents, or interest, or tax paid or accrued. Include the foreign currency name or abbreviation in the description and enter the foreign currency amount.
- Foreign taxes paid or accrued in U.S. dollars - Enter the USD amounts in the appropriate field(s). Note that any foreign currency amount withheld, paid, or accrued must have a corresponding USD converted amount here.
IRS: Instructions for Form 1116, Foreign Tax Credit (Individual, Estate, or Trust)
IRS: Publication 514, Foreign Tax Credit for Individuals
IRS: Publication 54, Tax Guide for US Citizens and Resident Aliens Abroad