Knowledge Center Tax Advice for Specific Needs

Form 1116 Explanation Statement: What You Need to File

When filing Form 1116 to claim the Foreign Tax Credit, you must attach a statement explaining how you calculated the credit. Here’s what you need to know to complete your Form 1116 explanation statement.

The Foreign Tax Credit is one of the most important tax benefits for any expat. Using this credit, you can reduce your U.S. tax bill—or erase it altogether—while living overseas. To claim the Foreign Tax Credit, you must complete IRS Form 1116 and attach a series of documents explaining how you calculated the credit. Those attached documents will serve as your Form 1116 explanation statement.

Not Sure If Your Explanation Statement Is Sufficient?

We’ll review your Form 1116 and supporting statement for compliance.

When Are Form 1116 Explanation Statements Necessary?

While several situations may require a Form 1116 explanation statement to the IRS, the most common use is to explain your Foreign Tax Credit calculation. Any expat who wants to claim this tax credit must submit a statement that shows how the amount was calculated for Part II of Form 1116.

What to Include in Your Form 1116 Explanation Statement

1. Taxpayer Information

When filling out a Form 1116 explanation statement, you should always include the following personal details:

Name
Address
Taxpayer identification number
The tax year

2. Foreign Tax Credit Calculation

You will also need to show your calculation for the Foreign Tax Credit. Show how you arrived at the numbers you entered on Part II of Form 1116. Remember: Your Foreign Tax Credit cannot exceed your total U.S. tax obligation multiplied by a fraction. The fraction is your taxable foreign income divided by your total taxable income from U.S. and foreign sources.

The Foreign Tax Credit Formula:

(Foreign Source Taxable Income ÷ Total Taxable Income Before Exemptions) x Total U.S. Tax = Foreign Sourced U.S. Tax

3. Conversion Rates

Before calculating the Foreign Tax Credit, you must use a conversion rate to get all figures to a common currency. You’ll use a Form 1116 explanation statement to show the foreign exchange conversion you used and the date it was determined.

Pro Tip

OANDA.com is a great source for reliable currency conversion rates.

4. Dates for the Conversion Rates You Used

If you want to use the exchange rate on the date you were paid, you can simply make that election on your Federal Tax Return. To do so, attach your explanation statement explaining your preference to use the currency conversion on the date you were paid, and ensure that your taxes are filed by the deadline. If you have accrued foreign taxes but haven’t paid them yet, use the exchange rate from the last day of the applicable tax year.

Which Statements Do You Need to Submit with Form 1116?

Depending on your circumstances, you may need to include various statements with your expat tax return. Examples include the following:

Alternative basis compensation source statement
Election to use the exchange rate statement
Financial services active financing income statement
Foreign audit explanation statement
Foreign income-related expenses statement
Foreign income net adjustment statement
Foreign tax credit carryback computation statement
Foreign tax reduction statement
Foreign tax withheld on dividends statement
Foreign tax withheld on interest statement
Foreign tax withheld on the rent and royalties statement
Other currency tax paid statement
Other deductions, not related statement

That’s a lot of statements. Luckily, only a few of these are routinely required.

Using Form 1116 Explanation Statements to Amend a Foreign Tax Credit

Another common use for a Form 1116 explanation statement is to amend a Foreign Tax Credit you’ve claimed on a previous tax return. For example, if you claim to have paid foreign taxes and then receive an unexpected refund for any part of those taxes from the foreign government, you will need to issue an amended return recalculating your Foreign Tax Credit. In this case, you will file Form 1040-X and attach a Form 1116 explanation statement so the IRS can verify your updates to your U.S. tax liability for the applicable tax years.

When amending a Foreign Tax Credit, the IRS will expect you to include the following information in your Form 1116 explanation statement:

Name
Address
Taxpayer identification number
Tax year that your amended Form 1116 will affect
Amount paid in foreign taxes
Dates the foreign taxes were accrued and paid
Currency conversion used

The IRS will also require all the necessary information to determine any interest due.

Greenback Can Help You File Your Form 1116 Explanation Statement

At Greenback Expat Tax Services, we help Americans around the world manage their U.S. taxes. Our team of expat-expert accountants can review your tax situation and file Form 1116 on your behalf—complete with a comprehensive explanation statement.

If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.

Get Your Foreign Tax Credit Filed Correctly

We’ll prepare Form 1116 and the required explanation statement with full compliance.

The information provided is for general guidance only and should not be considered professional tax advice. Tax laws and regulations are subject to change, and individual circumstances may vary. Please consult with a qualified tax professional for specific advice regarding your tax situation.