What Is the Difference Between Active and Passive Income Categories on Form 1116?

Form 1116 requires you to calculate the Foreign Tax Credit separately for each income category. The two most common categories for expats are the general category (active business and employment income) and the passive category (investment income, such as dividends, interest, rents, and royalties). You cannot use excess credits from one category to offset tax in another (IRS: Form 1116 Instructions).

The four Form 1116 categories:

Why the separation matters:

• Each category has its own FTC limitation: the credit for each category is capped at (foreign-source income in that category / worldwide income) x U.S. tax
• Excess credits don’t cross categories: if you have $5,000 in excess general-category FTC but owe $3,000 in passive-category tax, you cannot use the general excess to offset the passive shortfall
• Carryover is category-specific: excess credits carry back 1 year and forward 10 years, but only within the same category

Common expat situations:

• Employed expat with a foreign brokerage account: wages go in the general category, dividends and capital gains go in the passive category; file two separate Form 1116s
• Self-employed with rental property abroad: business income in the general category, rental income in the passive category (unless you qualify as a real estate professional)
• CFC owner: GILTI income gets its own category and its own Form 1116

Getting the category wrong can result in wasted credits in one basket while you owe additional tax in another. Track foreign taxes paid by income type throughout the year.

For more, see our Form 1116 guide.