The Foreign Tax Credit: What US Expats Need to Know

For US expats, one of the biggest tax headaches is the risk of double taxation, paying income tax to your country of residence and the US.

The IRS Foreign Tax Credit (FTC) is designed to solve that problem. It allows you to claim a dollar-for-dollar credit on your US taxes for foreign income taxes you’ve already paid.

In 2025, the FTC remains one of the most powerful tools for Americans living abroad, especially in high-tax countries like the UK, Canada, and Japan. In this article, we’ll explain how the credit works, who benefits most, and how to use it strategically to reduce or even eliminate your US tax bill.

What Is the Foreign Tax Credit?

The Foreign Tax Credit (FTC) prevents double taxation on the same income by the US and a foreign country. For many US expats, learning how to claim the Foreign Tax Credit can mean the difference between paying thousands in extra taxes or keeping that money in their pocket.

If you pay income taxes abroad, you can use the FTC to directly reduce your US tax bill by the amount of foreign taxes paid, up to the portion of your US tax that applies to that same foreign income. Unlike the Foreign Earned Income Exclusion, it applies to both earned and passive income.

How to Qualify for the Foreign Tax Credit

To qualify for the Foreign Tax Credit (FTC), you must have foreign income taxed by a country not sanctioned by the US. However, there are a few additional requirements. The tax must be a legitimate income tax (or one treated as such) that you are legally required to pay. The income must also be taxable in the US and not already excluded under the Foreign Earned Income Exclusion (FEIE).

What You Can’t Claim with the Foreign Tax Credit

The Foreign Tax Credit does have a few limitations:

How to Claim the Foreign Tax Credit: Form 1116 Instructions

Form 1116 is quite a hefty form to file, as it involves many calculations, and you’ll need to complete a separate form for each income category.

Gather Your Documents

As with most forms, taxpayers must collect all relevant documentation. This includes foreign income statements such as salary records, dividend receipts, or bank interest, as well as proof of any foreign taxes paid (e.g., receipts, pay stubs, or foreign tax returns). You don’t need to submit these documents with Form 1116, but you must keep them on file in case the IRS requests them later.

Determine the Type of Foreign Income

Determining which type of income is one of the most important steps to filing Form 1116. Choosing the incorrect category is a common mistake, so double-check before calculating.

Here is a list of the top 3 most common income categories:

• Passive income – such as interest, dividends, or royalties
• General category income – such as foreign-sourced wages
• Foreign branch category – income, such as foreign-sourced self-employment income

Part I: Taxable Income or Loss

Enter foreign income in the right category and convert to US dollars using the correct IRS exchange rate.

Part II: Foreign Taxes Paid or Accrued

Document the foreign and US currencies in this section, and convert the foreign taxes paid or accrued into US dollars.

Part III: Figuring the Credit Credit

Calculate the Foreign Tax Credit limit using the formula: (foreign income ÷ total income × US tax), This determines the maximum credit you can claim.

Part IV: Summary of Credits

Add up credits, attach Form 1116 to your return, and include any required schedules (e.g., Schedule B for carryovers).

Calculating the Foreign Tax Credit Limit

The IRS uses a specific formula to calculate the Foreign Tax Credit limit called the Foreign Tax Credit limitation (or FTC limit).

For example, let’s say you earned $100,000 in US‑sourced income and $50,000 in foreign‑sourced income from Italy (after converting using the IRS exchange rate). Your total income is $150,000, and your total US tax liability is $10,000.

Since one‑third of your total income is foreign‑sourced ($50,000 ÷ $150,000), you can apply that ratio to your US tax liability to calculate your FTC limit:

FTC Limit = (50,000 ÷ 150,000) × 10,000 = $3,333

This means you could claim up to $3,333 in foreign tax credits for that year.

Foreign Tax Credit vs. Foreign Earned Income Exclusion

Both the Foreign Tax Credit (FTC) and the Foreign Earned Income Exclusion (FEIE) help US expats avoid double taxation, but they work in very different ways.

• Foreign Tax Credit (FTC): Gives you a dollar‑for‑dollar credit for foreign taxes you’ve paid, directly reducing your US tax bill.
• Foreign Earned Income Exclusion (FEIE): Lets you exclude up to $130,000 (for 2025) of earned foreign income from US taxation.

Whether you choose the Foreign Tax Credit vs the Foreign Earned Income Exclusion (FEIE), or both, will depend on your tax situation. If you’re in a high-tax country like Canada or Japan, the Foreign Tax Credit could be the better option. If your foreign earned income is under the FEIE limit and you live in a lower-income tax country, using the FEIE may be better.

Your tax approach is critical because switching from the FEIE to the Foreign Tax Credit can make you ineligible for the FEIE for five years. Mistakes can be costly, but with MyExpatTaxes, we can guide you through the process and help you make the right choice.

When the Foreign Tax Credit is a Better Choice

The FTC works best if you live in a high-tax country or have income the FEIE doesn’t cover, such as dividends, rental income, or pensions. It also lets you keep benefits the FEIE can block, such as the refundable Child Tax Credit or Roth IRA contributions, which require earned income that you don’t exclude.

It can also offer valuable flexibility with the FTC carryover. Unused credits can be carried back one year or forward up to ten years, which can help smooth out years when your income or tax rates vary.

Real‑World Examples

High-Tax Carryover – Sarah, a US expat earning $90,000 in the UK and paying $25,000 in UK taxes, could eliminate her US tax liability using the FTC and still have excess credits to apply in future years, something the FEIE wouldn’t offer.

Parent Claiming the CTC – Lisa, a US expat in Spain earning $70,000, pays enough Spanish tax to have no US tax bill with the FTC. Because she didn’t exclude her earned income with the FEIE, she still qualifies for the refundable Child Tax Credit, receiving $1,700 per child.

High‑Tax Salary Earner – Michael, a US citizen working in Germany, earns $85,000 a year and pays about $25,000 in German income taxes. Because Germany’s tax rate on his income is higher than the US rate, the FTC wipes out his US tax bill entirely.

Use the table below to compare FTC and FEIE side‑by‑side:

Feature	Foreign Tax Credit (FTC)	Foreign Earned Income Exclusion (FEIE)
Covers passive income?	✅ Yes	❌ No
Covers earned income?	✅ Yes	✅ Yes (up to $130,000 in 2025)
Keeps refundable Child Tax Credit?	✅ Yes	❌ No
Allows Roth IRA contributions?	✅ Yes	❌ No
Can carry over unused benefit?	✅ Yes, up to 10 years	❌ No

Claiming the Foreign Tax Credit Without Filing Form 1116

In some limited cases, you can claim the Foreign Tax Credit without filing Form 1116. This exception applies only if all of the following are true:

• All of your foreign income for the year is passive category income (such as interest, dividends, or certain royalties, not wages or self-employment income).
• Your total foreign taxes paid are $300 or less if filing single, or $600 or less if married filing jointly.
• You received payee statements (e.g., Form 1099-DIV or Form 1099-INT) that report all of your foreign income and foreign taxes.

This generally applies to taxpayers with small amounts of passive foreign income and low foreign taxes paid.

Common Mistakes & Pitfalls

Misunderstanding the 5‑year rule: Switching from the FEIE to the FTC locks you out of using the FEIE again for five years without IRS approval—a mistake that can be costly if your situation changes.

Not tracking carryovers: If your foreign tax credits exceed your US tax liability, you can carry them back one year or forward for up to 10 years—but the IRS expects you to keep accurate records to claim them later.

Claiming both the FTC and FEIE incorrectly: You can claim both the FTC and FEIE, but the IRS doesn’t allow you to apply them to the same income.

MyExpatTaxes is Here to Help!

Form 1116 can be time‑consuming and complex, involving exchange rate conversions, selecting the correct income category, and calculating the Foreign Tax Credit (FTC) limit. Avoid penalties and missed credits by filing with MyExpatTaxes.

Our Tax Professionals handle the entire process for you, whether you need help claiming the FTC, following Form 1116 instructions, or deciding between the FTC and FEIE for your situation. We also track any credits that can be carried forward to future years, ensuring you receive every benefit you’re entitled to.

Foreign Tax Credit (FTC) FAQ

What is the Foreign Tax Credit?

The Foreign Tax Credit (FTC) is a dollar-for-dollar credit that reduces your US tax bill based on income taxes paid to a foreign country. It’s designed to prevent double taxation on foreign income, which is especially important for US citizens living or working abroad. You claim it by filing IRS Form 1116 with your tax return.

Can I claim the Foreign Tax Credit without filing Form 1116?

In limited cases, yes. If all your foreign income is passive (like dividends or interest), and your total foreign taxes don’t exceed $300 (single) or $600 (joint), you may be able to claim the credit without Form 1116. You must also have a payee statement like a 1099 showing foreign taxes paid.

How do I qualify for the Foreign Tax Credit?

To qualify, you must earn foreign-sourced income that a foreign country taxes and the US also taxes. The tax must be a legal, actual income tax, and the country cannot be sanctioned by the US.

What income qualifies for the Foreign Tax Credit?

Foreign income that’s subject to both foreign and US taxation can qualify. This includes wages, self-employment income, interest, dividends, and royalties. The key requirement is that the foreign country must levy a tax on the income, and you must report it on your US return.

What income or taxes are excluded from the FTC?

You can’t claim the credit for taxes paid to sanctioned countries like Iran or North Korea. It also doesn’t apply to taxes on income from certain investments, oil or gas sales, self-employment taxes, or income linked to international boycotts. Taxes that the IRS doesn’t consider to be income taxes also don’t qualify.

Can I use both the Foreign Tax Credit and the FEIE?

Yes, but only if you apply them to different income sources. For example, you can exclude foreign wages with the FEIE and use the FTC on foreign dividends or wages that exceed the exclusion limit. You must carefully track and allocate your income when using both benefits together.

Is the Foreign Tax Credit refundable?

No, the Foreign Tax Credit is not refundable. It can reduce your US tax liability down to zero, but if your credit exceeds your total tax owed, you won’t receive a refund. You can carry any unused portion of the credit back to the previous year or forward for up to 10 years.

If I have extra credits, can I apply them to other years?

Yes. If your foreign taxes paid are higher than the portion of US tax owed on that income, the unused credit doesn’t go to waste. You can carry the excess back to the previous tax year or forward for up to 10 years, which can help offset future US tax liability on foreign income.