Form 1116 - Foreign Tax Credit
As a U.S. citizen, if you have income from outside of the United States with foreign taxes deducted, you can use form 1116 to claim the foreign taxes against US tax on the same income.
Tests to claim the foreign tax
All 4 tests must be met to claim any foreign tax as a credit on form 1116:
The tax must be a legal and actual foreign liability
The tax must be imposed on you
You must have paid or accrued the tax, and
The tax must be an income tax
Separate form 1116 for each category of income
The United States splits income into different categories for tax purposes - you will need to file a separate form 1116 for each category of income.
General income - wages, salary, bonuses, self employed income and other trading/business income
Passive income - interest, dividends, capital gains, royalties, annuities and rental profits
Section 951A income - is otherwise referred to as global intangible low-taxed income (GILTI) and is included by U.S. shareholders of certain controlled foreign corporations
Foreign tax credits (FTC) carryovers
You calculate the foreign tax on each source of foreign income and complete the form 1116 for that category. If the foreign tax is more than the U.S. tax on the same foreign income, the foreign tax credit is restricted - the U.S. will not refund foreign tax.
The restricted foreign tax credit is available to carry back for 1 year and carryover for 10 years.
Each category of FTC will be ring-fenced when you carry forward - e.g. passive carryovers can only be used against foreign passive income in the future.
Foriegn Earned Income Exclusion - Form 2555
If the foreign tax credits do not eliminate all the tax on your foreign income, you may also want to look at the foreign earned income exclusion, using form 2555 - further details are here.
When To File
While you are living abroad as a U.S. expat, the filing deadline for the U.S. tax return is June 15 each year (extended to July 15 for 2020).
Form 1116 is filed with your main federal tax return with the IRS.
Form 2555 is filed with your main federal tax return with the IRS.
Next Steps
If you have any questions, e.g. if you do qualify as a bona fide resident, feel free to contact one of our US expat accountants here