The Foreign Tax Credit (FTC) helps Americans living abroad avoid paying income tax twice on the same income. If you pay qualifying income taxes to another country, you may be able to use those taxes to reduce or eliminate your US federal income tax liability.
This guide explains how the Foreign Tax Credit works for tax year 2026, which foreign taxes qualify, how credits are calculated, and how to claim the FTC when filing your 2027 US tax return.
The Foreign Tax Credit (FTC) is a US tax benefit that allows eligible taxpayers to reduce their US federal income tax using qualifying income taxes paid or accrued to a foreign country.
It helps prevent double taxation when the same income is taxed by both the United States and another country.
Unlike a tax deduction, the FTC generally reduces US income tax dollar for dollar, subject to applicable limitations.
US citizens generally must report their worldwide income on their federal tax returns, even when they live and work in another country.
This means an American working in Germany, Spain, or the UK may be subject to income tax in their country of residence while also having US federal tax obligations.
The Foreign Tax Credit helps address this overlap.
For example, suppose an American living in Canada earns $80,000 and pays $20,000 in qualifying Canadian income taxes.
If the US federal income tax attributable to that foreign income is $10,000, the taxpayer may be able to use $10,000 of foreign tax credits to eliminate that US income tax liability.
The remaining foreign taxes do not automatically produce a US refund, although qualifying unused credits may be carried to other tax years.
|
Feature |
General rule |
|---|---|
|
Purpose |
Reduce double taxation of foreign-source income |
|
Type of benefit |
Nonrefundable federal income tax credit |
|
Annual dollar cap |
No fixed dollar cap; FTC limitation applies |
|
Qualifying taxes |
Generally foreign income taxes and certain taxes in lieu of income taxes |
|
Eligible income |
May include wages, business income, dividends, interest, and other income |
|
IRS form |
Generally Form 1116 |
|
Unused credits |
Generally carried back 1 year or forward 10 years, subject to exceptions |
|
FEIE interaction |
No credit for foreign taxes attributable to excluded income |
|
Filing year |
2027 for tax year 2026 |
US citizens and resident aliens may qualify for the Foreign Tax Credit (FTC) when they pay or accrue eligible foreign income taxes on income that is also subject to US federal income tax.
Unlike the Foreign Earned Income Exclusion (FEIE), the FTC does not require taxpayers to live abroad or meet a minimum number of days outside the United States.
The FTC is generally available to eligible US taxpayers who have foreign income and qualifying foreign tax liabilities.
Eligibility depends on the taxpayer’s income, foreign tax liability, and applicable US tax rules.
You do not have to live overseas to claim the Foreign Tax Credit.
For example, an American living in the United States who receives dividends from foreign investments may qualify for a credit if foreign income tax was withheld from those dividends.
The FTC is particularly relevant for Americans abroad because their employment, business, and investment income may be taxed in both countries.
Generally, yes. The FTC is based on qualifying foreign income taxes paid or accrued.
Simply earning foreign income does not automatically create a foreign tax credit.
For example, an American working in a country that does not impose personal income tax may have little or no foreign income tax available to claim as a credit.
The amount of credit available also depends on the applicable US tax limitations.
Not sure which foreign taxes count?
Our expat tax specialists can check what you’ve paid abroad, confirm which of those taxes qualify, and tell you exactly what you can claim on your US return so you don’t overpay.
Not every tax paid to a foreign government qualifies for the Foreign Tax Credit. Generally, the IRS allows credits for qualifying foreign income taxes and certain taxes imposed in place of income taxes.
A foreign tax must satisfy specific US requirements, regardless of how it is classified or named in the foreign country.
Generally, a foreign tax must meet the following conditions:
Additional requirements may apply, including rules concerning how the foreign tax is calculated and the income being taxed.
Examples of potentially creditable foreign taxes include:
Whether a particular tax qualifies depends on its characteristics and the applicable US tax rules.
The following generally cannot be claimed as foreign tax credits:
|
Foreign tax or payment |
Generally eligible for FTC? |
|---|---|
|
German income tax on employment earnings |
Yes, if qualifying |
|
UK income tax on employment earnings |
Yes, if qualifying |
|
Spanish personal income tax |
Yes, if qualifying |
|
Foreign dividend withholding tax |
Potentially |
|
Foreign VAT |
No |
|
Foreign property tax |
No |
|
Foreign tax penalties |
No |
|
Foreign social security contributions |
Generally no, subject to specific rules |
Foreign social security contributions are generally treated differently from foreign income taxes and often do not qualify for the FTC.
Contributions covered by a Social Security Totalization Agreement generally are not creditable. However, some foreign levies may require separate analysis because their treatment under US law can differ from their classification in the foreign country.
Paying foreign social security?
Universal Tax Professionals can review your foreign payroll deductions, tell you which ones count toward the FTC, and check whether a Totalization Agreement applies to you.
Unlike the FEIE, the FTC does not have a fixed annual dollar limit such as $132,900.
Instead, the credit is generally limited to the portion of US federal income tax attributable to the taxpayer’s foreign-source taxable income.
The available credit is generally the smaller of:
A simplified version of the calculation is:
FTC limitation = US income tax before credits × (foreign-source taxable income ÷ worldwide taxable income)
The actual calculation can require adjustments for deductions, preferential tax rates, income categories, and other factors.
Example: Foreign taxes are higher than US taxes
Suppose an American living in France has the following amounts:
|
Item |
Amount |
|---|---|
|
Foreign-source taxable income |
$80,000 |
|
Qualifying French income taxes |
$20,000 |
|
US income tax attributable to that income |
$12,000 |
|
Foreign Tax Credit used |
$12,000 |
|
Unused qualifying foreign taxes |
$8,000 |
In this simplified example, the taxpayer may use $12,000 of foreign tax credits to eliminate the US income tax attributable to the foreign income.
The remaining $8,000 may be eligible for carryback or carryforward treatment, depending on the applicable rules.
Example: Foreign taxes are lower than US taxes
Suppose another American lives in a country with relatively low income taxes.
|
Item |
Amount |
|---|---|
|
US income tax attributable to foreign income |
$10,000 |
|
Qualifying foreign income taxes |
$4,000 |
|
Foreign Tax Credit used |
$4,000 |
|
Remaining US income tax |
$6,000 |
In this example, the FTC reduces the US income tax but does not eliminate it.
Other available tax benefits may affect the final liability.
These examples are simplified to explain the mechanism. Actual Form 1116 calculations may produce different results.
The FTC may apply to several types of income, provided the related foreign taxes qualify and the applicable sourcing and limitation rules are satisfied.
Unlike the FEIE, the FTC is not restricted to compensation earned from employment or self-employment.
Qualifying foreign income taxes paid on salaries and wages may be eligible for the FTC.
For example, an American employed in the UK who pays UK income tax on their salary may be able to claim a credit against US federal income tax attributable to that income.
Self-employed Americans may claim foreign tax credits for qualifying foreign income taxes imposed on their business earnings.
However, the FTC generally reduces federal income tax, not US self-employment tax.
Foreign taxes on dividends, interest, and certain capital gains may qualify.
For example, an American receiving dividends from foreign investments may be eligible to claim foreign withholding taxes, subject to the applicable requirements.
Qualifying foreign income taxes imposed on pension distributions may potentially generate foreign tax credits.
However, pension taxation and income sourcing can be affected by applicable tax treaties and other rules.
|
Income type |
FTC may apply? |
|---|---|
|
Foreign employment salary |
Yes |
|
Foreign self-employment income |
Yes |
|
Foreign business profits |
Potentially |
|
Foreign-source dividends |
Yes |
|
Foreign-source interest |
Yes |
|
Foreign-source capital gains |
Potentially |
|
Foreign pension distributions |
Potentially |
|
Income excluded under FEIE |
No credit for taxes attributable to excluded incom |
The FTC is calculated according to applicable income categories, rather than combining all foreign taxes into one unrestricted pool.
One of the most important FTC requirements is that foreign income and related taxes must be assigned to the correct category, sometimes called an income basket.
The IRS generally requires separate FTC calculations for different categories of income.
General Category Income
General category income commonly includes wages, salaries, and certain business income that is not classified in another category.
For example, an American working for a Spanish company may report qualifying Spanish employment income and related taxes in the general category.
Passive Category Income
Passive category income commonly includes:
However, exceptions and reclassification rules may apply.
Other Categories
Depending on the taxpayer’s circumstances, additional categories may include foreign branch income, treaty-resourced income, and certain other separately classified income.
|
FTC category |
Common examples |
|---|---|
|
General category |
Foreign wages and certain business income |
|
Passive category |
Foreign interest and dividends |
|
Foreign branch category |
Certain income attributable to a qualified foreign branch |
|
Treaty-resourced category |
Certain income treated as foreign-source under a tax treaty |
Foreign tax credits generally cannot be freely transferred between different income categories.
For example, excess foreign taxes associated with employment income generally cannot be used to offset US tax on passive investment income.
This can result in additional US income tax even when the taxpayer has paid substantial foreign income taxes overall.
Americans who pay more qualifying foreign taxes than they can claim under the Foreign Tax Credit (FTC) limitation may be able to use the unused credits in another tax year.
For most FTC income categories, unused credits can generally be:
Carried back one year to offset eligible US taxes from the previous tax year.
Carried forward up to 10 years to reduce eligible US taxes in future years.
These rules are subject to certain limitations, and not all foreign tax credits qualify for carryovers.
Example: Carrying Forward Excess Foreign Tax Credits
Suppose an American living in Australia has $6,000 in unused general-category foreign tax credits from 2026.
In 2027, their foreign taxes are lower, resulting in a higher potential US tax liability on their foreign income.
They may be able to apply some of their unused credits from 2026 to reduce their 2027 US income tax, provided they meet the applicable FTC limitations and carryover requirements.
Unused credits subject to the ten-year carryforward period expire if they cannot be used within the permitted period.
Credits also remain subject to their original income category and other restrictions.
Taxpayers should therefore maintain records of unused credits by year and category.
Have unused foreign tax credits?
Our team can track your excess credits by year and category, and show you how to use them before they expire.
Yes, in certain circumstances, but not on the same excluded income.
The Foreign Earned Income Exclusion allows qualifying taxpayers to exclude eligible foreign earned income from US federal income tax.
The Foreign Tax Credit instead provides a credit for qualifying foreign income taxes.
Taxpayers cannot generally claim foreign tax credits for taxes attributable to income excluded under the FEIE or foreign housing exclusion.
Example: Claiming FEIE and FTC together
Suppose an American earns $160,000 in qualifying foreign employment income during 2026.
They qualify for the full FEIE of $132,900. The remaining $27,100 of foreign earned income is not excluded by the FEIE. The taxpayer may potentially claim a Foreign Tax Credit for eligible foreign income taxes attributable to the nonexcluded income.
However, the foreign taxes attributable to the $132,900 of excluded income generally cannot be claimed as credits.
Often, the FTC may be advantageous for Americans living in countries where income tax rates are comparable to or higher than US rates.
For example, Americans living in Germany, France, or the UK may generate sufficient foreign income taxes to offset much of their US federal income tax.
However, the better option depends on income, deductions, filing status, eligibility for tax credits, and future circumstances.
The FTC should not automatically be selected solely because the foreign country’s headline tax rate is high.
FTC or FEIE: which saves you more?
Our expat tax specialists can compare both options for your income and country, so you file the way that costs you the least.
Most Americans claim the Foreign Tax Credit (FTC) by completing IRS Form 1116 and filing it with their US federal income tax return.
Form 1116 determines how much foreign tax can be credited against US income tax based on foreign-source income, qualifying foreign taxes, applicable deductions, and FTC limitations.
Determine which income qualifies as foreign-source under US tax rules. This may include wages earned while working abroad, self-employment income, and certain foreign investment income.
Identify the foreign income taxes eligible for the credit. Supporting documents may include foreign tax returns, payslips, withholding statements, and tax assessments.
Separate your foreign income and related taxes into the appropriate FTC categories, such as general-category income or passive-category income.
You may need to complete a separate Form 1116 for each applicable category.
Calculate the FTC limitation for each income category to determine how much foreign tax can be credited against your US tax liability.
If your qualifying foreign taxes exceed the allowable credit, you may be able to carry the unused amount to another tax year, subject to the applicable rules.
Complete Form 1116, if required, and report the allowable credit on Schedule 3 (Form 1040). The credit is then applied against your eligible US income tax liability.
Certain taxpayers can claim the Foreign Tax Credit (FTC) without filing Form 1116 if they meet the IRS requirements.
This simplified option generally applies to qualifying passive income, such as foreign dividends or interest, when the foreign taxes are reported on qualified payee statements.
To qualify, your total creditable foreign taxes must not exceed:
Additional eligibility requirements apply, including restrictions on the types of foreign income and taxes involved.
Taxpayers who use this simplified option generally cannot carry back or carry forward unused foreign tax credits for that year.
Not all foreign government taxes are eligible for the FTC.
VAT, property taxes, penalties, and many social security contributions generally do not qualify.
Foreign income taxes attributable to excluded income generally cannot also be claimed as credits.
Employment income and passive investment income may require separate FTC calculations.
Using the wrong category can lead to an incorrect credit.
The FTC is subject to a limitation.
Paying $20,000 in foreign income taxes does not necessarily mean a taxpayer can claim a $20,000 credit in the same year.
The location of a bank account, employer, or payer does not always determine whether income is foreign-source under US tax rules.
For example, compensation for services is generally sourced according to where the services are performed.
Excess credits may remain available for future years, but taxpayers must track them by year and income category.
Some countries use tax years that do not match the US calendar year.
This can create differences in when income and foreign taxes are reported and may affect the credit calculation.
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