What foreign taxes do not qualify for the U.S. Foreign Tax Credit?
The Foreign Tax Credit is limited to compulsory foreign income taxes. Value-added tax, sales tax, property tax, social security contributions (absent a totalization agreement), excise taxes, and penalties are all non-creditable. You cannot use these amounts to offset your U.S. federal income tax liability on Form 1116.
Taxes that do not qualify:
- VAT, GST, sales tax: Consumption taxes, not income taxes
- Property tax: Based on asset value, not income
- Social security and national insurance: Covered only by totalization agreements, not the FTC
- Excise taxes: Fuel, tobacco, alcohol
- Stamp duty and transfer taxes: Transaction taxes
- Penalties, interest, fines: Punitive or administrative, not income tax
- Refundable amounts: Net amount after refund is the creditable amount
Taxes that do qualify:
| Tax type | Example |
| Foreign national income tax | UK income tax, German Einkommensteuer |
| Foreign provincial or state income tax | Canadian provincial, Swiss cantonal |
| Withholding on wages | PAYE-style systems |
| Withholding on investment income | Foreign dividend or interest withholding |
Special rules to watch:
- Dual capacity taxpayer rules limit credits for royalties in some oil and gas regimes
- Credit for taxes in lieu of income tax can apply to certain withholding
- Refundable credits reduce the creditable amount (claim the net)
- Compulsory requirement: Optional or elective foreign taxes do not qualify
For category tracking on Form 1116, see our Foreign Tax Credit Guide.
Last updated on April 29, 2026
