Nearly 9 million Americans live abroad. If you’re an American working in Hong Kong, you might worry about paying taxes twice. Fortunately, the foreign tax credit the IRS provides can offset your U.S. tax on those foreign earnings.
Good news, claiming this credit is easier than it sounds.
How IRS credit works
The foreign tax credit lets you subtract your foreign income tax (paid or accrued) directly from your U.S. tax bill. Instead of a deduction, which only reduces taxable income, the credit cuts your tax dollar-for-dollar. Here’s what to know:
- You can choose a credit or a deduction. Credits are usually more valuable.
- The credit can’t exceed the U.S. tax on your foreign source income, so you won’t get credit for amounts above that.
- It only applies to foreign income taxed by both the U.S. and the foreign country, so some local levies don’t qualify.
Who qualifies for credit
To qualify, your foreign levy must meet four tests:
- Imposed on you, not on your employer or an entity.
- Paid or accrued by you during the tax year.
- The legal and actual tax liability under local law.
- An income tax or a tax in lieu of income tax.
Most Hong Kong salaries tax meets these criteria. If you receive passive income abroad, such as dividends or rental earnings, you may need to track a separate pool for that category. Final regulations published January 4, 2022 clarified eligibility, and Notices in July and December 2023 extended relief for partnerships and S corporations.
How to file your claim
You’ll use Form 1116 to report your foreign taxes and claim the credit. Here’s a quick walkthrough:
Form 1116 essentials
- Report your foreign income, tax paid or accrued, and the calculation.
- Attach Form 1116 to your Form 1040, 1040-SR, or 1040-NR.
- If you paid under $300 in foreign income tax ($600 married filing jointly), you can skip Form 1116 and claim the credit directly.
For detailed guidance see how to claim foreign tax credit or download the foreign tax credit form.
Managing leftover credits
If your credit exceeds your U.S. liability, you can apply the extra to other years:
| Credit option | Time period | Notes |
|---|---|---|
| Carryback | 1 year | Apply to the prior year tax bill |
| Carryforward | 10 years | See foreign tax credit carryover for details |
Keep in mind Alternative Minimum Tax rules can affect your available credit.
Recap and next steps
- Gather Hong Kong tax records and proof of payment.
- Confirm your foreign taxes meet the four qualifying tests.
- Complete and attach Form 1116 (or file Form 1040-X to amend).
- Apply any unused credit to prior or future returns.
- Stay informed on rules to maximize your benefit.
At American Pacific Tax, we guide you through every step, so you never miss a credit. You’ve got this.
Frequently asked questions
Do I need Form 1116 if I paid only a small amount of foreign tax?
If your foreign income taxes total under $300 ($600 married filing jointly), you can skip Form 1116 and claim the credit directly on your return.
Can I get a refund if my foreign tax exceeds my U.S. tax?
You can’t get a refund for excess foreign tax, but you can carry it back one year or forward up to ten years.
Do Hong Kong salary taxes qualify for the foreign tax credit?
Yes, Hong Kong’s salaries tax typically meets all tests, since it’s imposed on you, paid in the year, and is an income tax under local law.
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