Tax Q&A in category: Foreign Tax Credit & Treaty Relief

Question 1

Is the Foreign Tax Credit refundable?

Accepted Answer

No, the Foreign Tax Credit is a nonrefundable credit, meaning it can reduce your U.S. federal income tax liability to zero but cannot generate a refund. If your foreign taxes exceed your U.S. tax on the same income, the excess does not come back to you as a payment. Instead, unused credits carry back one year and forward ten years under IRC Section 904(c).

How nonrefundable credits work on your return: ScenarioU.S. tax before FTCForeign tax paidFTC allowedResultForeign tax < U.S. tax$12,000$8,000$8,000$4,000 U.S. tax owedForeign tax = U.S. tax$12,000$12,000$12,000$0 U.S. tax owedForeign tax > U.S. tax$12,000$16,000$12,000$0 owed + $4,000 excess carries What happens to excess credits:

Carry back 1 year: Amend the prior-year return to apply unused FTC first
Carry forward 10 years: Apply against future U.S. tax in the same FTC category
Category tracking: Passive, general, GILTI, and foreign branch carryovers stay in their own lanes on Form 1116 Schedule B
Oldest first: IRS requires you to use the earliest carryover year before later ones

Why excess credits build up:

You live in a high-tax country (Germany, France, Australia, UK) where rates exceed U.S. rates on the same income
You have GILTI inclusions where Section 960 credits are limited to 80%
Timing differences between when foreign tax accrues and when U.S. income is recognized

Excess credits are not lost, but they can expire after 10 years. If you have a growing carryover balance, review whether adjusting your FEIE/FTC strategy or income timing could put those credits to work sooner.

For carryover tracking, see our Foreign Tax Credit carryover guide. For a broader FTC strategy, see our Foreign Tax Credit Guide.

Question 2

Can I claim the Foreign Tax Credit if my employer withholds foreign tax on my behalf?

Accepted Answer

Yes. Foreign income tax that your employer withholds from your paycheck qualifies for the Foreign Tax Credit on your U.S. return, provided the tax is a legally required income tax. You claim the credit on Form 1116 using your foreign payslips and year-end wage statement.

What qualifies as creditable withholding:

Foreign national income tax withheld from wages
State or provincial income tax withheld by employer (Canadian provincial, German Länder)
Required final taxes like certain PAYE systems (UK, Ireland, Australia)
Must be a compulsory income tax, not a fee or social insurance contribution

What does not qualify:

Social security taxes (unless a totalization agreement redirects them)
Value-added tax or sales tax
Refundable amounts you got back via foreign return
Penalties and interest on foreign tax

Documentation to keep: DocumentUseForeign payslipsMonthly withholding detailYear-end wage statementTotal foreign tax paid (T4, P60, Lohnsteuerbescheinigung, etc.)Foreign tax returnReconciles estimated withholding to final liability Form 1116 reporting:

Category: General category income for wages
Converted to USD using the annual average exchange rate or payment date rate
Paid vs accrued: Cash-basis filers use the payment date; accrual uses tax-year accrual

Avoid double-claiming:

You cannot claim the FTC on foreign wages you already excluded with the FEIE
Split income carefully if you claim both FEIE and FTC in the same year

For the mixed FTC and FEIE strategy, see our Foreign Tax Credit Guide.

Question 3

Can I use the Foreign Tax Credit for taxes paid to a U.S. state if I live abroad?

Accepted Answer

No, the Foreign Tax Credit applies only to income taxes paid to foreign countries or their political subdivisions. State income taxes paid to a U.S. state do not qualify for the FTC, even if you live abroad. State tax on U.S.-source income is handled on your state return, not through federal FTC rules.

Why state taxes don’t qualify for the FTC:

FTC requires a foreign levy: U.S. states are not foreign governments
Federal return separation: State taxes are deducted on Schedule A (if itemizing) or otherwise not creditable at the federal level
FEIE does not reduce state tax in most states either

How expats handle state tax:

Severe residency with the state before moving abroad (change driver’s license, voter registration, mailing address)
File a final part-year return in the move year
Move to a no-income-tax state (Texas, Florida, Washington, Nevada, South Dakota, Wyoming, Tennessee, Alaska, New Hampshire) before departure if practical
Be aware that California, Virginia, New Mexico, and South Carolina are aggressive on expat residency

When state tax does offer credits:

Some states allow a credit for foreign taxes on foreign-source income for state residents
This credit is taken on the state return, not the federal return
Rules vary widely by state

For state ties and residency planning, see our State Taxes for Expats.

Question 4

Do U.S. tax treaties protect me from Social Security and Medicare taxes?

Accepted Answer

No. U.S. income tax treaties cover federal income tax but do not cover Social Security and Medicare (FICA) taxes. A separate type of bilateral agreement called a Totalization Agreement governs Social Security double taxation between the U.S. and roughly 30 partner countries.

What income tax treaties do:

Reduce or eliminate withholding on dividends, interest, royalties, and pensions
Allocate residency tie-breaker rules
Provide business profits and permanent establishment rules
Require Form 8833 disclosure when overriding the Code

What totalization agreements do:

Eliminate the double Social Security and Medicare tax for workers paying into both systems
Exempt you from both the 12.4% Social Security and 2.9% Medicare portions of FICA when the agreement assigns coverage to the foreign country
Allow credit for foreign contributions toward U.S. Social Security benefit eligibility
Require a Certificate of Coverage from the exempting country’s social security agency
Cover self-employed workers as well as employees

Countries with U.S. totalization agreements: RegionExamplesEuropeUK, Germany, France, Ireland, Netherlands, Spain, Italy, Sweden, SwitzerlandAmericasCanada, Chile, Brazil, UruguayAsia-PacificJapan, South Korea, Australia Without a totalization agreement:

You may owe 15.3% U.S. self-employment tax (12.4% Social Security + 2.9% Medicare) plus foreign social charges
Foreign social security contributions do not qualify for the FTC and cannot offset the Medicare tax
Some employees are exempt via the employer side of the agreement
Self-employed expats in non-agreement countries often face the full double hit on both Social Security and Medicare

For totalization planning, see our Social Security Taxes for Expats.

Question 5

Does the U.S. have a tax treaty with my country of residence that affects pension taxation?

Accepted Answer

Most U.S. tax treaties contain a pension article that generally assigns primary taxing rights to your country of residence, with exceptions for government pensions and, in some cases, Social Security. The specific treaty with your country of residence controls whether the U.S. or a foreign country taxes your pension first.

Common pension treaty patterns:

Private pensions: Usually taxed by the residence country only
Government pensions: Usually taxed by the paying country, unless you are a citizen of the residence country
Social Security: Varies. Many treaties assign taxing rights to residence country
Pension lump sums: Some treaties have special rules or carve-outs

Country examples: CountryPension taxation under the treatyUKPrivate pension taxed in the residence country; U.S. Social Security taxed only in the residence countryCanada15% withholding allowed on pension lump sums; periodic pensions taxed by residenceGermanyResidence country primary; government pensions have carve-outsFranceResidence country primary How to claim treaty benefits:

Form 8833: Disclose treaty-based return positions
Form W-8BEN: Give to the U.S. pension payer to claim treaty withholding rate
Foreign treaty claim: File with the foreign tax authority if they must reduce withholding
Savings clause: Most treaties let the U.S. still tax U.S. citizens, so treaty benefits are limited for Americans

Watch for:

Savings clause exceptions that preserve certain benefits (Social Security, for example)
Article numbers vary by treaty (Pensions usually Article 17 or 18)
Resident certifications may be required from both countries

For specifics on the pension treaty, see our foreign pension U.S. tax guide.

Question 6

How do I claim a Foreign Tax Credit for foreign taxes shown on my 1099-DIV?

Accepted Answer

Foreign taxes listed in Box 7 of your 1099-DIV qualify for the Foreign Tax Credit. These are taxes that a foreign government withheld on dividends paid by international stocks or mutual funds held in your U.S. brokerage account. You can claim the credit on Form 1116 or, if your total foreign taxes are small enough, skip Form 1116 entirely using the simplified election.

Where to find the numbers on your 1099-DIV: BoxWhat it reportsHow it connects to the FTCBox 1aTotal ordinary dividendsPart of your gross incomeBox 7Foreign tax paidThe amount eligible for FTCBox 8Foreign country or U.S. possessionThe sourcing country for Form 1116 Two ways to claim the credit: 1. Simplified election (no Form 1116 required):

Total creditable foreign taxes for the year are $300 or less ($600 if married filing jointly)
All foreign tax was reported on a payee statement (1099-DIV, 1099-INT, or Schedule K-1)
You have no carryover credits from prior years
Claim directly on Schedule 3 (Form 1040), line 1

2. Form 1116 (required if above the threshold):

Report foreign taxes in the passive category (most dividend withholding is passive)
Enter the country from Box 8 and the tax amount from Box 7
Calculate the FTC limitation based on foreign-source passive income vs. total income

Common situations for expats:

Multiple funds with different countries: Group by country on separate Form 1116 columns or use the simplified election if under the threshold
Mutual funds holding international stocks: The fund passes through foreign tax; your share appears in Box 7
Tax-advantaged accounts: Foreign taxes withheld inside an IRA or 401(k) are not creditable because the income is not currently taxable

If your 1099-DIV foreign taxes push you over the simplified election limit, or you have other foreign income, see our Foreign Tax Credit Guide.

Question 7

What foreign taxes do not qualify for the U.S. Foreign Tax Credit?

Accepted Answer

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 typeExampleForeign national income taxUK income tax, German EinkommensteuerForeign provincial or state income taxCanadian provincial, Swiss cantonalWithholding on wagesPAYE-style systemsWithholding on investment incomeForeign 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.

Question 8

Can I claim the Foreign Tax Credit if my employer pays my foreign taxes during an international assignment?

Accepted Answer

Yes, if the employer-paid foreign taxes are grossed up into your taxable compensation. The Foreign Tax Credit is available only for foreign taxes imposed on you. When an employer pays foreign tax on your behalf, and the tax equalization or gross-up arrangement treats it as additional compensation, those taxes are treated as yours for FTC purposes.

Common employer tax arrangements:

Tax equalization: Employer pays all foreign and U.S. tax; you pay a hypothetical home-country tax
Tax protection: Employer covers only the excess over what you would pay at home
Laissez-faire: Employer does nothing; you pay foreign tax yourself

FTC treatment by arrangement: ArrangementFTC available?Tax equalization (grossed up)Yes, on the gross-up incomeTax protectionYes, on tax you boreLaissez-faireYes, on tax you paidForeign tax paid by the employer, not grossed upGenerally, no; not imposed on you Gross-up mechanics:

Foreign tax paid by employer: Added to your W-2 as imputed income
Infinite iteration: Technically, grossing up itself triggers more tax, solved iteratively
FTC base: The grossed-up amount is your foreign tax paid

Documentation needed:

Assignment letter describing tax equalization or protection policy
Hypothetical tax calculation from mobility tax provider
Foreign tax return showing actual taxes paid
W-2 with gross-up detail

For corporate expat FTC planning, see our Foreign Tax Credit Guide.

Question 9

What Is the Saving Clause in a U.S. Tax Treaty and How Does It Affect Expats?

Accepted Answer

The saving clause is a provision in nearly every U.S. tax treaty that preserves the United States’ right to tax its own citizens and residents as if the treaty did not exist. It means that U.S. citizens living abroad generally cannot use a tax treaty to reduce their U.S. tax on worldwide income, even if the treaty would otherwise exempt or reduce tax on that income (IRS: United States Income Tax Treaties).

What it does: allows the U.S. to override treaty benefits for its own citizens and residents
Where it appears: typically in Article 1 (General Scope) or the “Saving Clause” paragraph of the treaty
Who it affects: U.S. citizens and green card holders, regardless of where they live
Who it does NOT affect: residents of the treaty partner country who are not U.S. persons

SituationWithout Saving ClauseWith Saving ClauseU.S. citizen in the U.K. earning U.K. wagesTreaty might exempt from U.S. taxU.S. taxes the wages anywayU.K. citizen in the U.S. earning U.S. wagesTreaty rules applyTreaty rules apply (not a U.S. citizen)U.S. citizen receiving a U.K. government pensionThe treaty might give the U.K. exclusive taxing rightsU.S. taxes the pension anyway, but the FTC is available Exceptions to the saving clause (benefits U.S. citizens CAN claim):

Foreign tax credits: the treaty does not block FTC claims
Certain pension articles: some treaties carve out specific pension provisions from the saving clause
Student and scholar exemptions: treaty articles exempting scholarship or teaching income often survive the saving clause for a limited period
Social Security benefits: some treaties assign exclusive taxing rights to the residence country, and this survives the saving clause

When you claim an exception to the saving clause, file Form 8833 to disclose the treaty-based position. Cite the specific treaty article and the saving clause exception paragraph.

The saving clause is why most U.S. expats rely on the FEIE and FTC rather than treaty benefits to reduce their U.S. tax. Treaties are more useful for reducing the foreign country’s tax on U.S.-source income.

For more, see our Form 8833 guide.

Question 10

Can I claim a Foreign Tax Credit for taxes paid to a country the U.S. doesn't have a tax treaty with?

Accepted Answer

Yes, the Foreign Tax Credit does not require a tax treaty between the U.S. and the country where you paid tax. The FTC is a unilateral provision of the Internal Revenue Code (Section 901) that allows you to credit qualifying foreign income taxes against your U.S. tax, regardless of whether a bilateral treaty exists.

How the FTC and tax treaties work independently: MechanismSourcePurposeRequires the other?Foreign Tax Credit (Section 901)U.S. tax codeOffset U.S. tax by foreign tax paidNoTax treatyBilateral agreementReduce or eliminate tax at source; resolve conflictsNo This means:

No treaty country (e.g., Brazil, Vietnam, Argentina, Singapore): You can still claim every dollar of qualifying foreign income tax on Form 1116
Treaty country (e.g., UK, Germany, Canada): The treaty may reduce foreign withholding rates, but the FTC itself does not depend on the treaty
Both can apply: In treaty countries, the treaty may lower foreign tax at the source, and you credit whatever remains

What matters for the FTC (with or without a treaty):

The foreign tax must be a compulsory income tax (not VAT, social security, or property tax)
The tax must be imposed on you (not a fee you chose to pay)
You must have foreign-source income in the relevant FTC category
You report on Form 1116 using the same rules regardless of treaty status

Where treaties do help separately:

Lower withholding rates on dividends, interest, and royalties (e.g., 15% instead of 30%)
Tie-breaker rules for tax residency when both countries claim you
Social security coordination through totalization agreements (separate from income tax treaties)
Pension relief in countries with specific pension articles (e.g., U.S.-UK treaty)

If you live in a country without a U.S. tax treaty, the FTC is your primary tool for preventing double taxation. For help determining which foreign taxes qualify, see our Foreign Tax Credit Guide.