Nearly 80 percent of U.S. expats end up paying income tax both abroad and at home. Good news, you can use the U.S. foreign tax credit to cut your American tax bill dollar for dollar based on what you paid in Hong Kong. For every $1 of salaries tax you send to the Inland Revenue Department, you could lower your U.S. tax liability by $1 (up to the IRS limit).

Key takeaway: by claiming the foreign tax credit, you can avoid double taxation on your Hong Kong income and unlock real savings.

Before we dive in, you may want to review our guide to U.S. expat tax implications in Hong Kong for the big picture.

Understand foreign tax credit

The foreign tax credit (FTC) lets you reduce your U.S. tax due by the amount of foreign income tax you paid or accrued. There’s no fixed dollar limit, but the credit can’t exceed your U.S. tax on that same income. Any unused FTC can be carried back one year or forward up to ten years.

To qualify for the FTC, a tax must be

  • compulsory (not voluntary)
  • imposed on you by a foreign country or U.S. possession
  • based on income, war profits, or excess profits

Hong Kong’s salaries tax fits the bill (capital gains, dividends, and interest aren’t taxed). If you pay 15 percent salaries tax here, you may erase up to 15 percent of your U.S. tax on that same wages income.

Gather required documents

You’ll need a clear trail of your foreign tax payments. At a minimum, collect:

  • Hong Kong Inland Revenue Department notice of assessment for salaries tax
  • Employer pay stubs or bank statements showing tax withheld
  • Records of deductions and allowances claimed in Hong Kong
  • Your prior U.S. return (Form 1040) and any foreign asset reports (Form 8938, FinCEN 114)

If you haven’t filed locally or need a refresher, see our overview of hong kong tax filing requirements for u.s. expats and the deadlines for expat returns.

Complete your credit claim

  1. Calculate your actual foreign tax paid or accrued during the year.
  2. Fill out IRS Form 1116 (Foreign Tax Credit) for each income category.
  3. Attach Form 1116 to your Form 1040 when you file.
  4. If you miss the April 15 deadline, you get an automatic extension to June 15 (interest may apply on any tax owed).

Good news—you don’t need to choose between exclusions and credits right away. You can claim the foreign earned income exclusion (FEIE) first and then use any leftover Hong Kong tax on Form 1116, or vice versa. We cover the pros and cons of each approach in our Hong Kong tax planning for U.S. expats.

Plan for long-term savings

Life and income levels change, and so can your credits. If you can’t use all your FTC in one year:

  • carry it back one year (to amend a return)
  • carry it forward up to ten years

This flexibility can smooth out ups and downs in your career or tax rates abroad. For example, if you switch jobs and jump into a higher U.S. bracket, unused credits from a lower-income year may wipe out new U.S. taxes entirely.

Quick recap and next steps

  1. Confirm foreign tax credit eligibility (compulsory, on income).
  2. Gather your Hong Kong assessments and payment records.
  3. Fill out and attach Form 1116 to your U.S. return.
  4. Strategize FEIE vs FTC to maximize savings.
  5. Track unused credits and use carryback or forward rules.

You’ve got this—using the foreign tax credit can turn Hong Kong’s tax bite into your U.S. tax benefit. When you’re ready, reach out to American Pacific Tax for a personalized assessment and smooth filing.

Frequently asked questions

Can I use both the FEIE and the foreign tax credit?
Yes, you can. You choose whether to apply the FEIE first (which shrinks your foreign-source income) or use the FTC first. Each option can be more advantageous depending on your income and Hong Kong tax rate.

Which Hong Kong taxes qualify for the FTC?
Only compulsory income taxes count. In Hong Kong that means salaries tax, profits tax, and property tax when it’s based on rental income. No credit for stamp duty, betting duty, or hotel accommodation tax.

How do I carry forward unused credits?
On your Form 1116, enter any unused credit in the “carryover” section. You can then apply it against U.S. tax in the next ten years. If you need to carry it back one year, file an amended return for that year with Form 1040-X.