Do You Need to File Form 1116 to Use the Foreign Tax Credit?

If you are planning to elect the Foreign Tax Credit, is it a requirement to file Form 1116? Find out when you need to file Form 1116 and when you don’t!

Do I have to file Form 1116 to claim the foreign tax credit?

If you plan to use the foreign tax credit, you generally need to elect this by filing Form 1116 but there are some exceptions. You can use the foreign tax credit without Form 1116 if the following apply:

  • Your only source of foreign income for the tax year is passive income
  • Your qualified foreign taxes for the year are not more than 300 US dollars or 600 US dollars if you’re filing in joint return
  • All of your gross foreign income and foreign taxes are reported to you on a payee statement such as a Form 1099, dividend or 1099 interest and then you elect this procedure for the tax year

Generally, this will only apply for people who have a very small amount of income that they’re paying foreign tax on. For instance, if you own some shares of a foreign corporation and you get a small dividend in the amount of $200 or something like that. The IRS doesn’t require that you file Form 1116 in those cases but you can still claim the foreign tax credit on the dividend or interest income that you earned on those assets.

How to use Form 1116 to claim the foreign tax credit

The foreign tax credit reduces your US tax burden dollar-for-dollar, but you can’t “double dip.” If you’re using Form 2555, the foreign earned income exclusion, to exclude your wages from US taxation, you can’t use the foreign tax credit on that same income.

For example, if you earned $211,800 while you’re overseas, you can exclude $105,900 of that using the foreign earned income exclusion in 2019. If you paid $60,000 in tax on that $211,800, then you could take the foreign tax credit on only $30,000 of the $60,000 you paid in tax. Basically, since you excluded half of your income using the Foreign Earned Income Exclusion, your foreign tax credit will be equal to half of the foreign taxes you had paid.

There may be situations where it would be more beneficial to use Form 1116 to claim the foreign tax credit instead of using Form 2555. For instance, people may prefer to use the foreign tax credit if they live in a high-tax area, like certain countries in Europe.

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