Most U.S. citizens living and working in Hong Kong pay local income taxes, only to owe the IRS on the same earnings. If you can’t claim the full foreign income tax you paid, the IRS lets you carry back unused credits for one year and carry forward for up to 10 years. That carryover window can save you thousands on future U.S. tax bills. Good news, the rules are straightforward once you break them down.
Key takeaway: Using an unused foreign tax credit carryover helps you avoid double taxation and lower future U.S. taxes.
Foreign tax credit basics
The foreign tax credit (FTC) offsets U.S. tax on income you already taxed in Hong Kong. It applies only to qualified foreign income taxes, not interest or penalties. If your foreign tax payment exceeds your U.S. tax on that income, you can’t claim the full credit right away. Instead, you can carry it back to the prior year or carry it forward up to 10 years. That flexibility prevents you from losing any benefit.
Learn more about the overall foreign tax credit.
Calculate your carryover
Before you elect a carryback or carryforward, figure out how much unused credit you have. You compute this separately for each income category, such as general or passive income. The limit in each category is the smaller of foreign tax paid and U.S. tax attributable to foreign source income.
Follow these steps:
- Total your qualified foreign income taxes in each category
- Subtract the credit you used on your original return
- The excess becomes your carryover amount
| Category | Foreign tax paid | Credit used | Carryover amount |
|---|---|---|---|
| General income | $15,000 | $6,420 | $8,580 |
| Passive income | $200 | $128 | $72 |
For a deeper look at the math, check our guide on foreign tax credit calculation.
File credit carryover
To claim a carryback or carryforward, you use IRS Form 1116. On a timely filed original return, you can elect to carry unused credit to future years. On an amended return, you carry it back to the prior year. Cash basis taxpayers typically claim in the year paid, unless they check the “accrued” box in Part II of Form 1116 (which lets you match the credit to when the tax accrued).
For details on form requirements, see Form 1116.
Plan future strategy
Keeping track of your carryover can streamline your annual filing. Here are some tips:
- Reconcile your carryover each year before you file
- Review whether a deduction makes more sense in years with low U.S. tax (see credit vs deduction)
- Account for special rules if you earn passive income (learn more about passive income carryover)
- Watch out for the alternative minimum tax and use the FTC AMT rules if they apply
A clear plan ensures you don’t miss any opportunity to reduce your U.S. tax.
Recap and next steps
- Confirm your unused foreign tax credit by category
- Elect a carryback on an amended return if you want to offset last year’s U.S. tax
- Claim a carryforward on your timely filed return for unused credit this year
- Track your remaining carryover each tax season
Choose one step to tackle first, and your next U.S. return will feel lighter. You’ve got this.
Frequently asked questions
How long can I carry over my unused credit?
You can carry unused credit back one year and forward up to 10 years. After 10 years, any unused carryover expires.
When should I elect a carryback?
If you had U.S. tax liability last year and paid more foreign tax, file an amended return with Form 1116. That applies your credit to the prior year.
Can I use carryover for passive income?
Yes, but you must track it separately under passive category rules. Explore how passive income credits work in our foreign tax credit passive income guide.
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