The foreign tax credit is a credit U.S. taxpayers can use to offset income taxes paid to a foreign government, preventing double taxation on income earned in both the U.S. and a foreign country. The credit is worth the amount of tax paid to a foreign government or wages earned, whichever is less. It can be used in conjunction with the foreign earned income exclusion or, alternatively, an itemized deduction for foreign income taxes.
What is Form 1116?
The Foreign Tax Credit is used by U.S. taxpayers to reduce the amount of their federal income tax owed to the IRS if they paid taxes on the same income to a foreign government. It is intended to prevent Americans from having to pay taxes twice on the same income earned in a foreign country. The Credit is the amount of income taxes paid to another country, or the amount of income earned, whichever is lower. A taxpayer can also claim an itemized tax deduction to offset their taxable income for foreign taxes paid, but they cannot do both. The Foreign Tax Credit is claimed by filling out and submitting IRS Form 1116 with their other taxes, and any unused credit can be carried over to future tax years if this form is completed.
IRS Form 1116 – Who Needs to Fill It Out?
The IRS Form 1116 is required for U.S. taxpayers to claim the foreign tax credit, which is a credit meant to reduce the impact of double taxation on income that is taxable in both the United States and the foreign country in which it was earned. The foreign tax credit is equal to the lesser of the U.S. tax attributable to a taxpayer’s foreign-source income or the amount of foreign tax paid. Claiming the credit requires that the criteria of four “tests” be satisfied – the tax must be imposed on the taxpayer, paid by them, and an actual foreign tax liability and an income tax or a tax in lieu of an income tax. The amount of the credit cannot exceed $300 or $600 if married and filing jointly. Claiming the tax credit does not preclude the option of filing an itemized tax deduction instead. The Foreign Earned Income Exclusion is also available as an alternative.
Step-by-Step: Form 1116 Instructions For Filling Out the Document
Filling out the form for the Foreign Tax Credit can be done easily with the steps below. Firstly, make sure to use IRS Form 1116 to calculate the credit for which you qualify. This form will help you work out any limitations to the amount of the credit you can claim. When filing your tax return, you can either include your foreign income taxes on Schedule A, or claim the credit directly on your Form 1040. If the total of your taxes paid is less than $300 ($600 if filing jointly), you may be able to bypass using Form 1116 altogether. Lastly, to take advantage of the carryover feature, make sure to use Form 1116 to calculate any carryover amounts.
Below, we present a table that will help you understand how to fill out Form 1116.
| Steps for Foreign Tax Credit | Details |
|---|---|
| Step 1: Use IRS Form 1116 | Calculate the credit using IRS Form 1116 |
| Step 2: Determine Limitations | Identify limitations on the credit amount |
| Step 3: Filing Options | Choose between two filing options:
|
| Step 4: Small Tax Amount Exception | If taxes paid are less than $300 ($600 if filing jointly), you may not need Form 1116 |
| Step 5: Carryover Feature | Calculate carryover amounts using Form 1116 |
Do You Need to File Form 1116 Each Year?
You must file Form 1116 each year to claim the foreign tax credit. This form calculates the various limitations placed on the amount of the tax credit that you are eligible for. All of your foreign taxes must be legally owed and were not eligible for a refund or a reduced tax rate under a tax treaty, and paid to countries recognized by the United States and do not support terrorism. The foreign tax credit can carryover to a future tax year, if not used; however, any excess credit amount is not refundable. It is important to speak to a tax professional to ensure that this is the most beneficial option for your personal tax situation.
Download the official IRS Form 1116 PDF
On the official IRS website, you will find a link to download Form 1116. However, to make it easier for you, we are providing the link in our article, which comes directly from the official irs.gov website! Click to download: Form 1116
Sources:
https://www.irs.gov/forms-pubs/about-form-1116
https://www.irs.gov/instructions/i1116
