Living in Hong Kong as an American can feel like juggling two tax systems, local and U.S. Your U.S. return may tax the same income twice. When weighing your foreign tax credit vs deduction options, you want the path that cuts your bill the most. At American Pacific Tax, we help you unlock savings and navigate IRS rules with confidence.
Choosing the foreign tax credit generally gives you a bigger benefit than itemizing a deduction. In one example, if you’re in the 24% bracket, a $5,000 deduction lowers your tax bill by about $1,200, whereas claiming a credit reduces it by the full $5,000. Read on to see which path suits you best.
Credit vs deduction overview
Foreign tax relief comes in two forms: a credit and a deduction. A credit reduces your U.S. tax liability dollar for dollar. A deduction lowers your taxable income (for example, through the Foreign Earned Income Exclusion, up to $130,000 per person in 2025). Generally you pick one or the other for all qualified taxes—you can’t mix and match. Good news, in most cases the credit delivers more tax relief.
When to choose credit
Here’s when the foreign tax credit typically wins.
Dollar-for-dollar relief
The credit directly offsets your U.S. tax bill up to the amount of foreign taxes you paid or accrued. No need to itemize on Schedule A. Rest assured a credit is almost always better than reducing your income.
Broad eligibility
Most income, war profits, and excess profits taxes qualify. You can also claim credits for foreign taxes on wages, dividends, interest, and royalties, subject to IRS rules. If you use the accrual method, claim the credit when the tax liability is fixed. On a cash basis you can choose to claim in the year you pay or accrue (see foreign tax credit carryover).
Carryback and carryforward
If your foreign credit exceeds your U.S. tax liability, you can carry the unused amount back one year or forward up to 10 years (learn more at foreign tax credit limitations).
When to consider deduction
Although credits usually shine, deductions have a few saving graces.
Non-creditable taxes
Taxes that aren’t levied on income—such as the French CSG and CRDS—don’t qualify for the credit. You may deduct these amounts if you itemize your return (Form 1040 Schedule A).
Income exclusion and itemized deductions
Deductions include the Foreign Earned Income Exclusion (up to $130,000 per person and $260,000 for couples filing jointly). If you have low foreign tax rates or earn below the FEIE threshold, the exclusion could work well. No need to overthink it, we’re here to guide you.
Comparing your options
Use the table below to see how the credit stacks up against the deduction.
| Feature | Foreign tax credit | Foreign tax deduction |
|---|---|---|
| Tax impact | Reduces your U.S. tax dollar for dollar | Lowers taxable income (tax savings vary by bracket) |
| Eligible taxes | Income, war profits, excess profits, passive income (dividends, interest) | Any foreign tax paid |
| IRS form | Form 1116 (see foreign tax credit form) | Schedule A (Form 1040) |
| Carryover | 1-year carryback, 10-year carryforward | No carryover |
| Filing options | Cash or accrual method | Cash method only |
Next steps and resources
- Gather your foreign tax statements for the year and translate amounts to U.S. dollars (see Form 1116 instructions).
- Decide on the accrual or cash method for claiming credits.
- Use our foreign tax credit calculation guide to estimate your savings.
- File Form 1116 or itemize on Schedule A, depending on your choice.
- Consult with American Pacific Tax if you need personalized support (we’ve got you).
You’ve got this, and your tax relief is just a few steps away.
Frequently asked questions
What foreign taxes qualify for the credit?
You can claim a credit for income, war profits, and excess profits taxes imposed by a foreign country or U.S. possession. Eligible items include taxes on wages, dividends, interest, and royalties (see foreign tax credit passive income).
Can I carry unused credit to other years?
Yes, if your credit exceeds your U.S. tax liability you can carry it back one year or forward up to 10 years (learn more in our foreign tax credit carryover article).
Do I need Form 1116 to claim the credit?
Most taxpayers use Form 1116 to report foreign taxes and calculate the credit. If your foreign taxes are under the general limitation ($300 for individuals, $600 for married filing jointly), you may claim the credit directly on Form 1040 without Form 1116.
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