If you work in Hong Kong, you may have paid local salaries tax that can reach 17% on your income. Without claiming the foreign tax credit form, you could face double taxation, first by Hong Kong then by the U.S. Good news (this is more straightforward than it sounds): Form 1116 lets you offset what you paid in Hong Kong against your U.S. federal tax bill. In this guide, you’ll learn how to use the foreign tax credit form so you get every dollar you deserve.
Here’s what you’ll learn: what the form covers, who qualifies, how to gather your records, step-by-step filing, and smart tips to maximize your credit and plan for a carryover if you hit the limit.
Understand form basics
Form 1116, often called the foreign tax credit form, reports your foreign taxes paid or accrued during the year. You file it with Form 1040 to claim a dollar-for-dollar reduction of your U.S. tax liability. It’s not refundable, but any unused credit can typically be carried back one year or forward ten years.
What the form covers
- Type of foreign tax (income, war profits, excess profits)
- Country or U.S. possession where the tax was imposed
- Amount of tax paid or accrued
- Foreign-source income on which the tax was based
Why it matters
Without Form 1116, the IRS treats foreign taxes as an itemized deduction on Schedule A. That may reduce your taxable income, but it won’t cut your U.S. tax dollar for dollar like the credit does. Claiming a credit often saves more, especially if your foreign rate exceeds U.S. tax on the same income.
Check your eligibility
You can claim a foreign tax credit if you meet these tests:
- You have foreign-source income that’s taxable by both Hong Kong and the U.S.
- You paid or accrued a foreign income tax that’s legally imposed (penalties and interest don’t qualify)
- You didn’t exclude that income under the foreign earned income or housing exclusion
- You make an annual choice: credit or deduction (you can’t take both)
If you paid French CSG or CRDS and didn’t claim it in past years, you have up to ten years from the original due date to file an amended return (2019 U.S.-France understanding).
Prepare and file your form
Gather required documents
- Hong Kong IRD notices or employer withholding statements (for example, IR56B)
- Proof of payment (bank statements or pay stubs)
- Your U.S. Form 1040, Schedule B (if you have interest or dividends)
- Any amended return forms (Form 1040-X) if you’re claiming past credits
Complete Form 1116
- Enter your name, tax year, and the foreign country.
- Report your foreign-source income in Part I.
- Enter taxes paid or accrued in Part II, splitting by category.
- Compute your limitation in Part III using the IRS formula.
- Sign and attach Form 1116 to your Form 1040.
Allocate taxes by category
Form 1116 divides your taxes into baskets. Here’s a quick look:
| Category | Typical income types |
|---|---|
| General | Wages, business profits |
| Passive | Dividends, interest |
| Branch | Foreign branch operations |
For detailed rules on these categories, see IRS guidelines on foreign tax credits.
Maximize your credit
Use the IRS formula
Your credit limit is calculated as:
(foreign taxable income ÷ total U.S. taxable income) × U.S. tax before credits
That fraction ensures you don’t claim more credit than the U.S. tax on that income. For a deeper dive, check our guide on foreign tax credit calculation.
Know your limits
For 2024, you can base your credit on up to $126,500 of foreign income per person (this can rise under certain tax treaties). Credit limits also vary by income category—see foreign tax credit limitations for the full breakdown.
Plan for carryover
If your foreign taxes exceed your U.S. limit, you can carry unused credit back one year or forward ten years. Learn more about strategies in our foreign tax credit carryover overview.
Compare with deductions
In some years, an itemized deduction may suit you better—especially if you already itemize and your foreign taxes are low. See how a credit stacks up against a deduction in foreign tax credit vs deduction.
Recap and next steps
- File Form 1116 to claim your foreign tax credit
- Keep clear records of income and taxes paid
- Mind the annual limit and income categories
- Plan a carryback or carryforward if you exceed the limit
- Compare credit vs deduction each year
You’re closer to a lower tax bill than you think. Next, download the Form 1116 instructions and start gathering your numbers. If you need support, visit our guide on how to claim foreign tax credit or reach out to our team at American Pacific Tax. We’re here to help you every step of the way.
Frequently asked questions
What is the foreign tax credit form used for?
Form 1116 lets you report foreign taxes paid or accrued and claim a dollar-for-dollar reduction in your U.S. tax liability.
How do I file for past years?
Attach Form 1116 to Form 1040-X and file an amended return. You have up to ten years from the return’s original due date to amend.
Can I use both the credit and deduction?
No, you must choose one each year. Most expats prefer the credit, but see our foreign tax credit vs deduction guide to decide.
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