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Credit for Taxes Paid or Accrued: Foreign Tax Credits (2025 IRS Guide)

This guide covers “Credit for Taxes Paid or Accrued” within foreign tax credits. 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 514 (2025), Foreign Tax Credit for Individuals, 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

The foreign tax credit is intended to relieve you of a double tax burden when your foreign source income is taxed by both the United States and the foreign country. In most cases, if the foreign tax rate is higher than the U.S. rate, there will be no U.S. tax on the foreign income. If the foreign tax rate is lower than the U.S. rate, U.S. tax on the foreign income will be limited to the difference between the rates. The foreign tax credit can only reduce U.S. taxes on foreign source income; it cannot reduce U.S. taxes on U.S. source income.

Although no one rule covers all situations, in most cases, it is better to take a credit for qualified foreign taxes than to deduct them as an itemized deduction. The following bullets explain why the credit may provide a greater tax benefit.

  • A credit reduces your actual U.S. income tax on a dollar-for-dollar basis, while a deduction reduces only your income subject to tax.

  • You can choose to take the foreign tax credit even if you do not itemize your deductions. You are then allowed the standard deduction in addition to the credit.

  • If you choose to take the foreign tax credit, and the taxes paid or accrued exceed the credit limit for the tax year, you may be able to carry over or carry back the excess to another tax year. (See Limit on the Credit under How To Figure the Credit, later.)

Credit for Taxes Paid or Accrued

You can claim the credit for a qualified foreign tax in the tax year in which you pay it or accrue it, depending on your method of accounting. “Tax year” refers to the tax year for which your U.S. return is filed, not the tax year for which your foreign return is filed.

Accrual method of accounting.

If you use an accrual method of accounting, you can claim the credit only in the year in which you accrue the tax. You are using an accrual method of accounting if you report income when you earn it, rather than when you receive it, and you deduct your expenses when you incur them, rather than when you pay them.

In most cases, foreign taxes accrue when all the events have taken place that fix the amount of the tax and your liability to pay it. Generally, this occurs on the last day of the foreign tax year for which your foreign return is filed.

You may have to post a bond.

If you claim a credit for taxes accrued but not paid, you may have to post an income tax bond to guarantee your payment of any tax due in the event the amount of foreign tax paid differs from the amount claimed.

The IRS can request this bond at any time without regard to the time limit on tax assessment, discussed later under Carryback and Carryover.

Cash method of accounting.

If you use the cash method of accounting, you can claim the credit only in the year in which you pay the tax. You are using the cash method of accounting if you report income in the year you actually or constructively receive it, and deduct expenses in the year you pay them. You can choose to take the credit in the year you accrue it. See Choosing to take credit in the year taxes accrue next.

Choosing to take credit in the year taxes accrue.

Even if you use the cash method of accounting, you can choose to take a credit for foreign taxes in the year they accrue. You make the choice by checking the “Accrued” box in Part II of Form 1116 on a timely filed original return. You cannot make this choice on an amended return. Once you make that choice, you must follow it in all later years and take a credit for foreign taxes in the year they accrue.

In addition, the choice to take the credit when foreign taxes accrue applies to all foreign taxes qualifying for the credit. You cannot take a credit for some foreign taxes when paid and take a credit for others when accrued.

If you make the choice to take the credit when foreign taxes accrue and pay them in a later year, you cannot claim a deduction for any part of the previously accrued taxes.

Credit based on taxes paid in earlier year.

If, in earlier years, you took the credit based on taxes paid, and this year you choose to take the credit based on taxes accrued, you may be able to take the credit this year for taxes from more than 1 year. See Regulations section 1.905-1(e)(3).

Example.

Last year, you took the credit based on taxes paid. This year, you chose to take the credit based on taxes accrued. During the year, you paid foreign income taxes owed for last year. You also accrued foreign income taxes for this year that you did not pay by the end of the year. You can base the credit on your return for this year on both last year’s taxes that you paid and this year’s taxes that you accrued.

Contesting your foreign tax liability.

In general, you cannot claim a credit for a contested foreign income tax liability until the contest is resolved and the amount of the liability is finally determined.

If you use the cash method of accounting, you cannot claim a credit for any portion of a tax liability you are contesting, even if you paid any portion of the liability to the foreign country. You can claim a credit once the contest is resolved and your foreign tax liability is determined. The tax is considered paid in the tax year in which the payment was made. See Regulations section 1.905-1(c)(2). Alternatively, you may elect to claim a provisional credit for contested taxes, as discussed later.

If you chose to take the credit in the year the foreign taxes accrue, you cannot claim a credit for any portion of a tax liability you are contesting, even if you paid any portion of the liability to the foreign country. You can claim a credit once the contest is resolved and your foreign tax liability is determined and paid. The tax is considered to accrue in the foreign tax year to which the contested tax liability is related (“relation-back year”). See Regulations section 1.905-1(d)(3). Alternatively, you can elect to claim a provisional credit for contested taxes. See the next paragraph for details.

Election to claim a provisional credit for contested taxes.

If you use the cash method of accounting, you may elect to take a provisional credit for any portion of a contested foreign income tax liability that you have paid to the foreign country in the year that you pay the tax. If you are an accrual-basis taxpayer or if you elected to claim your foreign tax credit on an accrual basis, you may elect to take a credit for any portion of a contested foreign income tax liability that you have paid to the foreign country in the relation-back year. To make the election, you must file Form 7204 with your return. In addition, for each subsequent tax year up to and including the tax year in which the contest is resolved, you must annually file Schedule C (Form 1116). If you receive from the foreign country a refund of any portion of the tax liability you contested and paid, you may have to adjust your credit, as discussed later under Foreign Tax Redetermination.

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

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.

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