All About Tax Form 1116 – A Guide for American Expats

Should you use Form 1116?

As an American living abroad, you must acquaint yourself with the necessary forms to file annually. Furthermore, you should know that there are US tax forms you can complete to help reduce any US tax liability you may have while living abroad. Today we are talking about tax Form 1116. Also known as the Foreign Tax Credit. We’ll discuss how to file it, who can use the FTC, and essential limits to be aware of before claiming it.

What is The Foreign Tax Credit, and Who Can Use It? 

Introducing the Foreign Tax Credit, a potential favor for an expats filing US taxes. The FTC helps US expats avoid double taxation when living and working abroad. It is particularly helpful when working in a country with higher tax rates than the US. 

Taking advantage of the Foreign Tax Credit, a non-refundable credit, may reduce (if not eliminate) your tax liability in the United States if you pay taxes to a foreign country. If you have paid more in taxes to the country you live and work in, you usually will not have to pay the IRS on that same income. This also applies to self-employed people, with regular employment, property income, and interest. 

While filing Form 1116 is not mandatory, it is useful when living and working abroad if you’ve paid taxes to a foreign government on an income that could be taxable in the US. 

Important to note: Form 1116 applies to trusts, estates, AND individuals. 

When Should I File Form 1116? 

You will need to file form 1116 when filing the rest of your expat taxes; check for any updated tax deadlines each year! 

Though the Foreign Tax Credit form is only two pages, it can be lengthy and quite detailed. You will need to include information such as: which country you paid taxes to, the amount, the type of income the tax is based on, all deductions, losses, and credit computation. 

You will need to calculate how much the foreign tax was in the applicable currency and the US dollar conversion rate on the date of each payment. We suggest using a spreadsheet to help keep track of this information throughout the year to ease your tax filing pains! 

We suggest using the IRS’ currency conversions to convert currency rates. However, any reputable currency converter is permitted.

Limits of Filing Form 1116

Before filing Form 1116 to claim Foreign Tax Credits, there are some limits you should be aware of. Those limits include:

• The amount of credit you claim cannot exceed the amount of tax paid on foreign earned income 
• You cannot claim the FTC if you live in Syria, North Korea, Cuba, or Iran because the Secretary of State considers them state sponsors of terrorism. 
• You also cannot claim FTC if the taxes are associated with:
  • financial service income
  • dividends of 10-50%
  • owned foreign corporations
  • domestic, international sales corporation dividends
  • foreign oil & gas extraction income
  • shipping & aircraft income
  • dividends from foreign sales corporations
  • foreign trade income of foreign sales corporations

Can I Claim the Foreign Tax Credit Without Filing Form 1116? 

In some exceptional cases, you can claim the Foreign Tax Credit without filing Form 1116. As long as the following apply: 

• In the tax year under consideration, all of your foreign income came from passive sources
• Your foreign taxes for the year did not exceed $300 when filing single 
• Your foreign taxes for the year did not exceed $600 when filing jointly 
• You receive a payee statement, including a dividend statement and a 1099 interest statement, that includes all your foreign income and foreign taxes

Unfortunately, these particular cases will only apply to a small number of US expats abroad. Primarily those who have a small income that they are already paying foreign taxes. If it does apply to you, the IRS does not require filing Form 1116 to claim the foreign tax credit. 

Foreign Tax Credit vs. Foreign Earned Income Exclusion 

It is possible to file both FTC and FEIE forms on your expat tax returns. However, we would like to make you aware that you cannot file form 1116 on an income already being excluded from your US tax return via the Foreign Earned Income Exclusion. 

Generally speaking, if you’re working in an area where the foreign tax rate is higher than the US federal tax rate (such as Austria, Sweden, or Japan, to name just a few), it is more beneficial to use The Foreign Tax Credit than FEIE. 

If you file Form 2555 (FEIE) and then switch the next year to Form 1116 (FTC) and revoke your FEIE claim, you may not be able to claim FEIE for up to five years unless the IRS directs you otherwise. So flip-flopping between tax approaches is not recommended. However, unfortunately, the majority of tax firms just by default choose FEIE for taxpayers, even if not as beneficial for them. Luckily at MyExpatTaxes, we run an optimization model to determine the best tax approach for your specific situation.  

You also cannot claim the Additional Child Tax Credit under the Foreign Earned Income Exclusion, but you can under The Foreign Tax Credit. 

Another thing to consider when deciding whether or not to file FTC or FEIE is how much money you have earned. If you earned less than the annual threshold ($120,000 in 2023) and pay little to no foreign taxes abroad, you would be better off filing FEIE, but bear in mind you will need to meet the IRS requirements to prove you live abroad.

Is it Required to File Form 1116? 

It is not required to file for The Foreign Tax Credit. However, it is to your benefit if it’s applicable! Especially when you consider the following: if you’ve paid more to a foreign government in taxes than you would have to the US government, you will receive an FTC carryover that allows you to either amend a prior year’s tax return while using the credits OR carry the credits forward for future years. 

We Are Here to Help! 

Our goal is always to provide clear and concise information. With that in mind, we understand how frustrating US Expat Taxes can be, and we are here to help! Getting your tax returns in order can be hefty, so let MyExpatTaxes help you get your ducks in a row. 

Already using MyExpatTaxes to file form 1116? Great! Follow the step-by-step guide in the HelpCenter!

Get started for free, pick a plan when you’re ready. Or see the Pricing Page for all the details.