Credit for Foreign Income Taxes: Taxes for Americans Abroad (2025 IRS Guide)

This guide covers “Credit for Foreign Income Taxes” within taxes for americans abroad. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 54 (12/2025), Tax Guide for U.S. Citizens and Resident Aliens Abroad, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

You can take either a credit or a deduction for income taxes paid to a foreign country or a U.S. territory. Taken as a deduction, foreign income taxes reduce your taxable income. Taken as a credit, foreign income taxes reduce your tax liability. You must treat all foreign income taxes the same way. If you take a credit for any foreign income taxes, you cannot deduct any foreign income taxes. However, you may be able to deduct other foreign taxes. See Deduction for Other Foreign Taxes, later.

There is no rule to determine whether it is to your advantage to take a deduction or a credit for foreign income taxes. In most cases, it is to your advantage to take foreign income taxes as a tax credit, which you subtract directly from your U.S. tax liability, rather than as a deduction in figuring taxable income. However, if foreign income taxes were imposed at a high rate and the proportion of foreign income to U.S. income is small, a lower final tax may result from deducting the foreign income taxes. In any event, you should figure your tax liability both ways and then use the one that is better for you.

You can choose to claim a credit or to change from claiming a deduction to claiming a credit at any time during the period within 10 years from the regular due date for filing the return (without regard to any extension of time to file) for the tax year in which the taxes were actually paid or accrued. You can also choose to claim a deduction or to change from claiming a credit to claiming a deduction at any time during the period within 3 years from the time you filed the return or 2 years from when you paid the tax, whichever is later. This 10-year or 3-year (or 2-year) period may be extended by an agreement. You make or change your choice on your tax return (or on an amended return) for the year your choice is to be effective.

Credit for Foreign Income Taxes

If you take the foreign tax credit, you may have to file Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), available at IRS.gov/Form1116, with Form 1040 or 1040-SR. Form 1116 is used to figure the amount of foreign tax paid or accrued that can be claimed as a foreign tax credit. Don’t include the amount of foreign tax paid or accrued as withheld federal income taxes on Form 1040 or 1040-SR, line 25.

The foreign income tax for which you can claim a credit is the amount of legal and actual tax liability you pay or accrue during the year. The amount for which you can claim a credit is not necessarily the amount withheld by the foreign country. You can’t take a foreign tax credit for income tax you paid to a foreign country that would be refunded by the foreign country if you made a claim for refund.

Subsidies.

If a foreign country returns your foreign tax payments to you in the form of a subsidy, you cannot claim a foreign tax credit based on these payments. This rule applies to a subsidy provided by any means that is determined, directly or indirectly, by reference to the amount of tax, or to the base used to figure the tax.

Some ways of providing a subsidy are refunds, credits, deductions, payments, or discharges of obligations. A credit is also not allowed if the subsidy is given to a person related to you, or persons who participated in a transaction or a related transaction with you.

Limit

The foreign tax credit is limited to the part of your total U.S. tax that is in proportion to your taxable income from sources outside the United States compared to your total taxable income. The allowable foreign tax credit can’t be more than your actual foreign tax liability.

Exemption from limit.

You won’t be subject to this limit and won’t have to file Form 1116 if you meet all three of the following requirements.

• Your only foreign source income for the year is passive income (dividends, interest, royalties, etc.) that is reported to you on a payee statement (such as a Form 1099-DIV or 1099-INT).

• Your foreign taxes for the year that qualify for the credit are not more than $300 ($600 if you are filing a joint return) and are reported on a payee statement.

• You elect this procedure.

If you make this election, you can’t carry back or carry over any unused foreign tax to or from this year.

Separate limit.

You must figure the limit on a separate basis with regard to section 951A category income, foreign branch category income, passive category income, general category income, section 901(j) income, certain income re-sourced by treaty, and any lump-sum distributions from an employer benefit plan for which the special averaging treatment is used to determine your tax (see the Instructions for Form 1116).

Figuring the limit.

In figuring taxable income in each category, you take into account only the amount that you must include in income on your federal tax return. Don’t take any excluded amount into account.

To determine your taxable income in each category, deduct expenses and losses that are definitely related to that income.

Other expenses (such as itemized deductions or the standard deduction) not definitely related to specific items of income must be apportioned to the foreign income in each category by multiplying them by a fraction. The numerator (top number) of the fraction is your gross foreign income in the separate limit category. The denominator (bottom number) of the fraction is your gross income from all sources. For this purpose, gross income includes income that is excluded under the foreign earned income provisions but does not include any other exempt income. You must use special rules for deducting interest expenses. For more information on allocating and apportioning your deductions, see Pub. 514, Foreign Tax Credit for Individuals, available at IRS.gov/Pub514.

Recapture of foreign losses.

If you have an overall foreign loss and the loss reduces your U.S. source income (resulting in a reduction of your U.S. tax liability with respect to U.S. source income), you must recapture the loss in later years when you have taxable income from foreign sources. This is done by treating a part of your taxable income from foreign sources in later years as U.S. source income. This reduces the numerator of the limiting fraction and the resulting foreign tax credit limit.

Recapture of domestic losses.

If you have an overall domestic loss and the loss reduces your foreign source income (resulting in a reduction in the amount of foreign tax credit you can claim for taxes paid during that year), you must recapture the loss in later years when you have U.S. source taxable income. This is done by treating a part of your taxable income from U.S. sources in later years as foreign source income. This increases the numerator of the limitation fraction and the resulting foreign tax credit limit.

Foreign tax credit carryback and carryover.

The amount of foreign income tax not allowed as a credit because of the limit can be carried back 1 year and carried forward 10 years.

Schedule B (Form 1116) is used to reconcile your prior-year foreign tax carryover with your current year foreign tax carryover. The schedule replaces the previous attachment requirement for Part III, line 10, of Form 1116. For more information, see the Instructions for Schedule B and the instructions for Form 1116, line 10, at Form 1116.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 54 (12/2025), Tax Guide for U.S. Citizens and Resident Aliens Abroad: Deductions and Credits — Taxes of Foreign Countries and U.S. Territories — Credit for Foreign Income Taxes — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.