As an American working in Hong Kong, you juggle US and local taxes on the same income. Good news, you have ten years to file an amended return if you discover you paid more creditable foreign taxes than you claimed (the window starts the day after your original due date). Mastering foreign tax credit limitations helps you offset more of your US liability. By understanding the limit formula and using carryover options, you’ll claim every dollar you deserve.

Understand credit limitations

The foreign tax credit lets you reduce your US tax bill by the amount you paid abroad, up to a cap. That cap prevents you from sheltering US income that didn’t incur foreign tax.

Limit formula

Your maximum credit equals your pre-credit US tax liability multiplied by a fraction:

  • Numerator: foreign-source taxable income
  • Denominator: worldwide taxable income

For example, if you have $80,000 in foreign-source income, $120,000 in total income, and $20,000 of US tax before credits, your limit is 0.667 × $20,000, or $13,333.

Qualified vs nonqualified taxes

Only foreign income taxes qualify for the credit. A 2019 US-France agreement clarified that the French CSG and CRDS charges aren’t social taxes, making them creditable if you paid them. Social security contributions still don’t count under the US-France pact, so check your local obligations carefully.

Calculate your limit

Accurate math lets you plan ahead. Follow these steps:

  1. Determine your foreign-source taxable income (include wages, interest, dividends).
  2. Sum your worldwide taxable income (US plus foreign).
  3. Find your US tax liability before credits (see line 16 of Form 1040).
  4. Apply the ratio from the limit formula above.

For detailed worksheets and examples, see our guide on foreign tax credit calculation.

Manage unused credits

If your foreign taxes exceed the limit, you have options to use the excess.

Carryback and carryforward

  • Carry back one year to recover prior shortfalls.
  • Carry forward up to ten years to offset future US tax.

These rules fall under IRC §904(c). For step-by-step instructions, visit our page on foreign tax credit carryover.

Form 1116 vs automatic election

You normally file Form 1116 to claim the credit. However, if your foreign-source gross income is under $300 ($600 for married filing jointly) and you meet other IRS requirements, you may elect to skip Form 1116. That simplifies filing but disqualifies you from carrying unused credits back or forward. Learn more at foreign tax credit form.

Navigate OBBBA updates

The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, overhauls several FTC rules effective for tax years beginning after December 31, 2025.

Higher deemed-paid credits for NCTI

For non-controlled tested income (NCTI), the deemed-paid credit jumps from 80 percent to 90 percent of foreign taxes attributable to tested income. At a 21 percent US corporate rate, that change can eliminate residual US tax on NCTI once your foreign effective tax rate hits about 14 percent.

New disallowance rule

OBBBA adds a 10 percent disallowance on FTC claims for amounts excluded under section 959(a) after prior GILTI inclusions. This prevents a full credit on income you previously excluded from US taxation.

Inventory sales election

You can treat up to 50 percent of income from selling US-produced inventory abroad as foreign-source income (capped at 50 percent of the sale). That election may reduce double taxation for multinational exporters.

Recap and next steps

  • Understand how the limit formula works.
  • Use the foreign tax credit calculation to find your cap.
  • Carry unused credits back or forward via foreign tax credit carryover.
  • Watch for OBBBA changes starting tax year 2026.

When you’re ready to file, check out our guide on how to claim foreign tax credit. At American Pacific Tax, we’re here to help you keep every dollar you’ve earned.

Frequently asked questions

What foreign taxes qualify for the credit?

Generally, only legal, nonrefundable income taxes imposed on you by a foreign country or US possession qualify. That includes taxes on wages, interest, dividends, and royalties, minus any refunds you receive.

How do I use unused foreign tax credits?

If your credit hits the limit, you can carry it back one year or forward up to ten years by filing Form 1116. If you meet the IRS’s small-income election criteria, you can claim the credit without Form 1116 but give up carryback and carryforward rights.

When do the OBBBA changes take effect?

All OBBBA foreign tax credit updates apply to tax years beginning after December 31, 2025. Plan now so you can optimize credits under the new regime.