If you’re like many US citizens living and working in Hong Kong, you juggle local salaries tax and a US return on the same income. Good news, you can offset that US liability by claiming the foreign tax credit.

Here’s your key takeaway: the foreign tax credit cuts your US tax dollar for dollar with the overseas tax you paid, helping you avoid paying twice on the same dollars.

Understand expat tax and credit

As a US citizen, you must report your worldwide income on Form 1040. That includes salaries, dividends, interest, and royalties you earn in Hong Kong. Meanwhile, Hong Kong’s salaries tax tops out at 17 percent on income above HKD 200,000 (around USD 25,600). You end up paying tax twice on the same income unless you take action.

A foreign tax credit provides a dollar-for-dollar reduction in your US tax liability for the taxes you pay abroad. In contrast, a foreign tax deduction only lowers your taxable income, which often gives you a smaller benefit. If you want to compare both options in detail, see foreign tax credit vs deduction.

The credit applies to most income taxes (wages, passive income, etc.) paid to a foreign country or US possession. It helps prevent double taxation, so you keep more of what you earn.

Qualify and compare your options

To use this credit, your foreign tax must meet four basic tests:

  • The tax was imposed on you.
  • You actually paid or accrued it (even if your employer withheld).
  • It’s a legal liability under foreign law.
  • It’s an income tax or a tax in lieu of an income tax.

According to IRS Publication 514, most Hong Kong salaries tax qualifies.

Next, weigh credit versus deduction:

  • Credit: direct dollar-for-dollar cut to your US tax.
  • Deduction: lowers your taxable income, so your savings vary by bracket.

Calculate and claim your credit

Compute your credit limit

You calculate your credit limit by multiplying your total US tax by a fraction: your taxable income from foreign sources over your total taxable income (US and foreign) (see foreign tax credit calculation). This formula stops you from offsetting US tax on US-source income.

If you face the alternative minimum tax, note that you compute a separate credit limit under AMT rules. For details, check foreign tax credit amt.

File the right form

Most individuals use Form 1116 to claim the credit. Here’s a quick checklist:

  1. Complete Form 1116 with your foreign tax paid details and credit limit (lines 18–22).
  2. Attach it to your Form 1040 (see foreign tax credit form).
  3. Include any required documentation (foreign tax receipts or HK Inland Revenue notices).

If you need detailed steps, visit how to claim foreign tax credit.

Monitor limits and next steps

Be mindful of annual limits set by the IRS. If you pay more foreign tax than you can credit this year, you can carry unused credits back one year or forward up to ten years (see foreign tax credit carryover). This carryover power helps smooth out years when you pay heavy foreign taxes.

Keep an eye on special situations if you invest through a mutual fund or earn passive income like dividends and interest (learn more at foreign tax credit passive income). For detailed IRS guidance, refer to our article on foreign tax credit irs.

At American Pacific Tax, we’re here to help you navigate these rules and plan ahead. You’ve got this—leveraging the foreign tax credit could be one of the smartest moves you make this year.

Common questions about the credit

How do I claim the foreign tax credit for Hong Kong salaries tax?

File Form 1116 with your Form 1040, listing your HK salaries tax paid and completing the credit limit calculation. For detailed steps, see how to claim foreign tax credit.

Can I carry unused foreign tax credits to future years?

Yes, you can carry back unused credits one year and carry forward up to ten years. Learn more at foreign tax credit carryover.

What types of income qualify for the credit?

Most income taxes on wages, interest, dividends, and royalties qualify, but property taxes and other levies do not. For exceptions and passive income details, check foreign tax credit passive income.