Mastering the U.S. Foreign Tax Credit (FTC)
Stop worrying about double taxation on your foreign income. The FTC is a powerful benefit that allows you to subtract taxes paid to a foreign country from your U.S. taxes. This guide will help you easily understand the complex FTC rules and show you how to maximize your tax savings.
The Core Choice: Credit vs. Deduction
There are two ways to account for foreign taxes paid. A 'credit' directly reduces your final tax bill, offering a much stronger benefit. See the difference for yourself in the chart below, based on a scenario of $100,000 income, $15,000 in foreign taxes paid, and a 24% U.S. tax rate.
Conclusion: In this scenario, the tax credit saves you $11,400 more than the deduction. Unless you're in a very specific situation, the credit is almost always the right answer.
Do I Qualify? The 4 Essential Tests
Not all foreign taxes are eligible for the FTC. You must pass all four of the following tests. Click each item to see the details.
The Expat's Dilemma: FTC vs. FEIE
If you live abroad, you have another option: the Foreign Earned Income Exclusion (FEIE, Form 2555). The best choice depends on your situation, specifically the tax rate of the country you live in. Click the buttons below to see the results for different scenarios.
Choose a scenario
Click a button to find out whether the FTC or FEIE is more advantageous in each situation.
Maximizing Benefits: The Power of Carryovers
Unused tax credits for the year don't just disappear. They become a powerful 'asset' that can reduce your future taxes. The rule is simple: carry back 1 year, carry forward 10 years.
Unused Credit Arises
This happens when your foreign taxes paid are greater than your U.S. tax limit (e.g., working in a high-tax country).
Carryback 1 Year
The unused credit is first applied to the previous year, potentially getting you a refund on taxes you've already paid.
Carryforward 10 Years
Any remaining amount is carried forward for up to 10 years. You can use this to significantly reduce your U.S. taxes if you move to a low-tax country or return to the U.S.
💡 Strategic Asset: By managing your FTC carryovers, you can use taxes paid in a high-tax country to save on U.S. taxes in the future.
How to File: Simple vs. Full Reporting
There are two ways to claim the FTC. The 'de minimis exception' is simple but may cause you to forfeit potential benefits. 'Form 1116' is more complex but is the path to utilizing 100% of your benefits.
✅ De Minimis Exception (Simple Filing)
Report directly on Form 1040 without filing Form 1116.
- ✔ Conditions: Foreign taxes of $300 or less (single) or $600 or less (joint), AND all income is passive (interest/dividends).
- ✔ Pro: Very simple and saves time.
- ❌ Critical Con: You cannot carry over any unused credits. They are lost forever for that year.
🏆 Form 1116 (Full Filing)
The comprehensive form to calculate all foreign income and taxes.
- ✔ Conditions: All cases that do not qualify for the de minimis exception.
- ✔ Pro: Allows you to carry over unused credits for 10 years, maximizing your benefit.
- ❌ Con: The form is somewhat complex and time-consuming.