What is the High-Tax Kickout (HTKO) on Form 1116?

HTKO (High-Tax Kickout) is a rule on Form 1116 that reclassifies passive income taxed at a high foreign rate into the general category basket. If the foreign tax on a specific item of passive income exceeds the highest U.S. tax rate (37% for individuals), that income “kicks out” of the passive basket and moves to the general basket for FTC limitation purposes (IRS: Form 1116 Instructions).

• What triggers HTKO: foreign tax on a passive income item exceeds 37% (the highest U.S. individual rate)
• What moves: the income and the associated foreign tax both shift from the passive to the general category
• Why it matters: It changes your FTC limitation calculation in both baskets

When HTKO helps expats:

• Excess passive FTC: if you have more passive foreign tax credits than your passive FTC limitation allows, HTKO moves the high-taxed income to general, where you may have room
• Country-by-country variation: one country taxes dividends at 40% (kicks out) while another taxes at 15% (stays passive)

When HTKO hurts:

• If your general basket is already maxed, adding more income and credits to an already-full general basket does not help
• Compliance complexity: You must track which passive items are high-taxed and file them separately

HTKO is automatic. You do not elect it. If any item of passive income bears foreign tax above 37%, the kickout applies on your Form 1116 whether you want it or not.

For more, see our Form 1116 guide.