As an American expat in Hong Kong, you’re paying local salaries tax that can top out at 17% on net income Hong Kong Inland Revenue Department. Good news, understanding foreign tax credit calculation can save you thousands by offsetting your U.S. tax dollar-for-dollar on the same income you’ve already taxed abroad. At American Pacific Tax, we’ll guide you through each step so you avoid double taxation and keep more of your earnings.

Understand eligibility requirements

Before you get started, check that your situation meets the IRS criteria for the credit:

  • The tax must be imposed on you by a foreign country or U.S. possession
  • You paid or accrued the tax during the tax year
  • It qualifies as an income tax or a levy in lieu of income tax
  • It isn’t a payment for a specific economic benefit (for example, a user fee)

Good news, Hong Kong’s salaries tax fits these tests most of the time. On the flip side, some local levies—like certain social security contributions—aren’t creditable.

Gather documents and file forms

Collect proof of foreign taxes

You’ll need:

  • Hong Kong tax assessments or receipts showing the amount of salaries tax you paid
  • Your total foreign-source income for the year
  • Exchange rates used to convert Hong Kong dollars to U.S. dollars (use the yearly average from the IRS)
  • If you’re a mutual fund shareholder, Form 1099-DIV that shows your share of foreign taxes paid by the fund

Complete IRS Form 1116

Form 1116 is your main tool. To fill it out:

  1. Pick the income category that matches your Hong Kong salary (usually “general”)
  2. Enter your foreign taxes paid in USD after conversion
  3. Calculate your foreign and U.S. taxable income on the form
  4. Follow the line-by-line instructions in IRS Publication 514 and attach Form 1116 to your Form 1040

Calculate your foreign tax credit

Use the IRS formula

Your credit limit equals:

(foreign-source taxable income ÷ total taxable income) × U.S. tax liability

For example, if 100% of your income is from Hong Kong, and your U.S. tax on that income is $5,000, you can claim up to $5,000 in foreign tax credits.

Account for income baskets

The IRS divides income into baskets—general, passive, and branch profits. You must calculate each basket separately. For salaries, you’ll use the general basket. For dividends or interest, use the passive basket.

If your foreign taxes paid are $300 or less ($600 if you file jointly), you can skip Form 1116 and claim the credit directly on Form 1040. This simplifies things but prevents you from carrying unused credits back or forward.

Considering Foreign Earned Income Exclusion

If you are also claiming Foreign Earned Income Exclusion, you should note that the foreign tax you paid on the foreign income that has been excluded under foreign earned income exclusion will be disallowed. Consult your U.S. Tax advisor for more details.

Plan for carryover options

If your foreign taxes exceed your credit limit, you can’t lose them:

  • Carry back unused credits one year
  • Carry forward unused credits up to 10 years

Most expats find that a quick review of prior-year returns maximizes their credit value. You’ve got this, a little planning goes a long way.

Quick recap and next step

  • Understand eligibility tests for foreign taxes
  • Gather your Hong Kong tax docs and complete Form 1116
  • Calculate your credit using the IRS formula and baskets
  • Plan to carry unused credits back or forward

Pick one step to tackle today, and you’ll be on your way to smoother U.S. tax filings. If you need expert help, American Pacific Tax is here for you.

Frequently asked questions

What if my foreign taxes exceed the U.S. credit limit?

You don’t lose the difference. You can carry unused credits back one year or carry them forward up to 10 years to reduce future U.S. tax bills.

Can I claim credit on dividends or interest?

Yes, passive income goes into its own basket. Use Form 1116’s passive income section to calculate that portion of your credit.

Do I need Form 1116 if my foreign taxes are small?

If your foreign taxes paid are $300 or less ($600 married filing jointly), you can claim the credit directly on Form 1040 without Form 1116. Remember, you won’t be able to carry unused credits forward or back.