Can the Foreign Tax Credit Reduce Future US Expat Taxes?

What if you use the Foreign Tax Credit to offset your US expat taxes, but you can’t use all that is available to you? Do you simply lose the credits? David McKeegan, Co-Founder of Greenback Expat Tax Services, explains the Foreign Tax Credit and what you can do with extra credits.


Hi everybody.  My name is David McKeegan.  I’m with Greenback Expat Tax Services and our question this week is around the Foreign Tax Credit carry over.

To review, the Foreign Tax Credit is a dollar-for-dollar tax credit that you can use to reduce your US tax burden by any taxes you’ve paid to a foreign county.  This could be a big win, especially for people that live in high tax countries such as those in Western Europe.

Four tests must be met for the tax to qualify for the Foreign Tax Credit.  The tax must be a legal and actual foreign tax liability.  The tax must be imposed on you personally, not on a business you own or anything like that.  You must have paid or accrued the tax and the tax must be an income tax or a tax in lieu of an income tax.

If you’re using the Foreign Tax Credit, you would fill out Form 1116 and that’s how you would receive the Foreign Tax Credit.  If you have a Foreign Tax Credit or an unused portion of your Foreign Tax Credit … so let’s say you were able to exclude a big chunk of your income using the Foreign Tax Credit and you have more tax credit than you have income to be excluded.

In these cases, you can carry that tax credit back backwards one year, so to the previous year, and file an amended return and use that tax credit on that tax return or you can carry the tax credit forward for up to 10 years to reduce your US tax liability in future years.

You can do either.  Usually you try carrying it backwards first and if you don’t have any tax to lower going back one year, then you’ll carry it forward for up to 10  years.

Please remember that the IRS makes no exceptions.  If you’re unable to carry the tax forward and use it within those 10 years, it just runs out.  You don’t get to apply for an 11th year or anything like that.

You can’t take the tax credit for taxes paid on income you excluded under the Foreign Earned Income Exclusion.  You can’t double dip.  You can’t use the Foreign Earned Income Exclusion and the Foreign Tax Credit on the same income.

Hope that helps and if you have questions, please let us know.

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