IRC § 901 · § 904

Foreign Tax Credit

The relief that works when no treaty does — and the limitation that decides how much of it you actually get.

Every rate on this page is cited to the treaty article that authorises it. Treaty texts last read September 21, 2026.

Quick answer
The foreign tax credit reduces your US tax, dollar for dollar, by the income tax you already paid another country on the same income. You do not need a treaty to claim it. What you do need is to survive the section 904 limitation, which caps the credit at your US tax multiplied by the share of your taxable income that is foreign source — so a credit can be reduced to nothing even when the foreign tax was very real.
Key takeaways
  • No treaty required. The credit is in the Internal Revenue Code, not in any treaty. Brazil has no income tax treaty with the United States and the credit still works there.
  • The limitation is the whole game. Credit ≤ US tax × (foreign source taxable income ÷ total taxable income). Pay tax at 40% abroad on income the US taxes at 22% and the difference is not creditable this year.
  • Unused credit carries back 1 year and forward 10 years. A deduction, by contrast, is gone.
  • Credit or deduction is an all-or-nothing annual choice. You cannot credit the tax on your dividends and deduct the tax on your salary in the same year.
  • Under $300 of foreign tax ($600 joint), all passive, all on a 1099 or K-3? You can skip Form 1116 entirely.

What the credit actually does

It subtracts foreign income tax you already paid from the US tax you owe on the same income — not from the income, from the tax.

The United States taxes its citizens and residents on worldwide income. Live in Berlin, earn in Berlin, pay tax in Berlin — the US still wants a return, and on the face of it wants tax on the same salary Germany has already taxed. Something has to stop that, and there are three candidates: a treaty, the foreign earned income exclusion, and this credit.

The credit is the one that works most often, because it does not depend on a treaty existing, on where you live, or on the income being earned income. It applies to income tax paid to almost any country on almost any kind of income. That breadth is why it is the default answer and the other two are special cases.

The word credit is doing precise work. A deduction of $1,000 reduces your taxable income by $1,000, which at a 22% marginal rate saves you $220. A credit of $1,000 reduces your tax bill by $1,000. That is the difference between the two mechanisms, and it is most of the reason the credit is usually the right choice.

Source: IRS — Foreign tax credit. Read 2026-09-21.

Who can claim it

Anyone filing a US return who paid or accrued foreign income tax on income the US is also taxing — citizens, green card holders, and residents alike.

There is no residency test to pass and no form to qualify for in advance. If you have foreign source income on your US return and a foreign country took income tax from it, you are in scope. That covers a wider group than people expect:

  • Americans abroad — the largest group, taxed twice on salary by definition.
  • US investors with foreign holdings — an international fund or a foreign dividend usually arrives with tax already withheld. This is the most common case of all, and most of these people qualify for the $300 shortcut below.
  • Green card holders — taxed on worldwide income like citizens, including income from the country they came from.
  • Resident aliens who keep income or property in their home country.
  • Someone who moved mid-year and was taxed by both systems on the same months.

Nonresident aliens are the main exclusion. A nonresident is taxed by the US only on US source income, so there is generally no double tax for the credit to relieve — and a nonresident’s route is usually the treaty rate at source, claimed on Form W-8BEN, rather than a credit afterwards.

Which foreign taxes count

Income taxes. Not sales tax, not VAT, not property tax, and not tax you could have avoided by claiming a treaty rate and did not.

The statutory test is narrow and is worth reading literally: “Generally, only income, war profits and excess profits taxes qualify for the credit.” The foreign levy has to be an income tax in substance — imposed on net gain, not on turnover or on the value of a thing.

These are not creditable, however much you paid
  • Value added tax, sales tax and goods-and-services tax — they are not income taxes.
  • Property tax, wealth tax and stamp duty.
  • Foreign social security contributions where a totalization agreement covers you, because the agreement is supposed to stop the double charge at source.
  • Any foreign tax you could have avoided under a treaty but did not claim. Relief you failed to ask for is not creditable — you are expected to have claimed the treaty rate.
  • Tax paid on income excluded under the foreign earned income exclusion or the foreign housing exclusion.

The last two in that list catch people out. A foreign tax you could have avoided under a treaty is not creditable — the US takes the view that you were supposed to claim the treaty rate, and declining to do so does not convert the extra tax into a US problem. If your country has a treaty and your broker withheld 30% instead of 15%, the fix is a correctly completed W-8BEN and a refund claim from the foreign payer, not a larger US credit.

The exclusion bar — the most expensive mistake on an expat return

“You cannot take a credit or a deduction for foreign taxes paid on income you exclude under the foreign earned income exclusion or the foreign housing exclusion.”

It is a bar on double relief, not a penalty. If you exclude the income, the tax on it is no longer yours to credit. If you exclude $130,000 of salary under the foreign earned income exclusion, you cannot then credit the foreign tax on that $130,000. You can use both provisions in one year only when you earn beyond the exclusion — and then only the tax on the part you did not exclude is creditable.

Source: IRS Publication 514 — Foreign Tax Credit for Individuals — IRC § 911(d)(6); Pub. 514. Read 2026-09-21.

The limitation — the part nobody shows you

Your credit cannot exceed your US tax multiplied by the share of your taxable income that came from abroad.

This is where the credit is won or lost, and it is the section every competing page describes without showing. Here is what section 904(a) actually says:

“The total amount of the credit taken under section 901(a) shall not exceed the same proportion of the tax against which such credit is taken which the taxpayer's taxable income from sources without the United States (but not in excess of the taxpayer's entire taxable income) bears to his entire taxable income for the same taxable year.”
IRC § 904(a)

Read slowly, that is a single fraction. As a formula:

Credit limit = US tax before the credit × (foreign source taxable income ÷ total taxable income)

And then: The credit allowed is the LESSER of this limit and the foreign tax actually paid or accrued.

The purpose is to stop you using a high foreign tax rate to erase US tax on US income. The credit is meant to relieve double taxation on the foreign slice of your income and no more, so the ceiling is set at exactly the US tax attributable to that slice. The parenthesis in the statute — “but not in excess of the taxpayer’s entire taxable income” — stops the fraction exceeding 1 in an odd year where foreign losses or deductions make the numerator larger than the denominator.

Foreign tax paid vs the section 904 ceiling
20% of income foreign sourcefully credited
Paid
$2,400
Ceiling
$3,200
Credited
$2,400
20% of income foreign source$1,800 carried
Paid
$5,000
Ceiling
$3,200
Credited
$3,200
50% of income foreign source$8,000 carried
Paid
$18,000
Ceiling
$10,000
Credited
$10,000
The ceiling tracks the foreign share of your taxable income, not the foreign tax you paid. That is why the third filer — half their income foreign, and heavily taxed on it — still leaves $8,000 on the table this year.
Source: 26 U.S.C. § 904 — Limitation on credit — IRC § 904(a). Read 2026-09-21.

The limitation, worked in numbers

Three filers, the same rule, three different answers — and only the first one credits everything they paid.

Every figure below is computed by the same function the site uses elsewhere, so the arithmetic here and the arithmetic on the Form 1116 page cannot disagree.

Foreign tax below the limit — you credit all of it
Amount
Total taxable income$100,000
Of which foreign source$20,000
Foreign share of taxable income20%
US tax before the credit$16,000
Limitation ceiling$3,200.00
Foreign tax actually paid$2,400
Credit allowed this year$2,400.00
Excess carried back 1 / forward 10—

The foreign tax came in under the ceiling, so the whole $2,400 is credited and nothing is deferred. This is what it looks like when the foreign country’s effective rate is below the US rate on the same income.

Foreign tax above the limit — the excess carries
Amount
Total taxable income$100,000
Of which foreign source$20,000
Foreign share of taxable income20%
US tax before the credit$16,000
Limitation ceiling$3,200.00
Foreign tax actually paid$5,000
Credit allowed this year$3,200.00
Excess carried back 1 / forward 10$1,800.00

The limitation decided this, not the tax paid. $5,000 went out of the door abroad and $3,200.00 came back this year; $1,800.00 waits for a year with a bigger foreign share or a higher US tax.

A high-tax country — most of the credit is deferred
Amount
Total taxable income$120,000
Of which foreign source$60,000
Foreign share of taxable income50%
US tax before the credit$20,000
Limitation ceiling$10,000.00
Foreign tax actually paid$18,000
Credit allowed this year$10,000.00
Excess carried back 1 / forward 10$8,000.00

The limitation decided this, not the tax paid. $18,000 went out of the door abroad and $10,000.00 came back this year; $8,000.00 waits for a year with a bigger foreign share or a higher US tax.

The pattern across the three is the one that matters: a credit is capped by the US tax on the foreign slice, so a country that taxes more heavily than the United States will always leave you with something you cannot use this year. That excess is not lost — see below — but it is not cash today either.

When the credit is more than you can use

Back 1 year, forward 10 years. Eleven years of shelf life, inside the same category.

Section 904(c) deems the excess to have been paid “in the first preceding taxable year and in any of the first 10 succeeding taxable years”. The order is not optional: the carryback comes first, and only what the prior year cannot absorb moves forward.

  • The carryback is to the one preceding year and is taken first; only what that year cannot absorb goes forward.
  • Carryovers stay inside their own category. Excess credits in the passive category cannot be used against a general category limitation in another year.
  • Section 951A (GILTI) category credits cannot be carried back or forward at all.
  • Tracking a carryover means filing Form 1116 with Schedule B for the year you generate it and every year you carry it, even when you are claiming nothing.
A carryover you do not track is a carryover you lose
The IRS does not compute this for you. An excess credit only survives if you file Form 1116 with Schedule B in the year you generate it and in every year you carry it — even a year in which you claim no credit at all. Ten years later, the Schedule B is the only evidence the carryover exists.
Source: 26 U.S.C. § 904 — Limitation on credit — IRC § 904(c). Read 2026-09-21.

Credit or deduction?

The credit, almost always — and it is an all-or-nothing choice you make once a year for every foreign tax at once.

You may instead deduct foreign income taxes as an itemized deduction. Publication 514 puts the constraint plainly:

“you must choose each year to take either a credit or a deduction for all qualified foreign taxes paid or accrued in that year. If you choose to take a credit for any qualified foreign taxes in a year, you must take the credit for all qualified foreign taxes paid or accrued in that year.”
IRC §§ 901(a), 164(a)(3); Pub. 514
What $1,000 of foreign tax is actually worth to you
As a credit
$1,000
As a deduction at 12%
$120
As a deduction at 22%
$220
As a deduction at 37%
$370
Even at the top marginal rate the deduction returns $370against the credit’s $1,000 — and the deduction is worth nothing at all unless your itemized deductions already beat your standard deduction.

Why the credit usually wins

  • A credit comes off your tax dollar for dollar. A deduction comes off your income, so it is worth only your marginal rate — at 22%, a $1,000 foreign tax is worth $1,000 as a credit and $220 as a deduction.
  • The deduction is an itemized deduction, so it is worth nothing at all unless your total itemized deductions beat your standard deduction.
  • The credit has a carryover; the deduction does not. An unused credit survives for eleven years in total, while a wasted deduction is simply gone.

The narrow cases where the deduction is better

  • Your foreign tax is on income that is not foreign source under US rules, so the limitation gives you a credit of zero and the deduction gives you something.
  • The tax is not a creditable income tax at all — a foreign VAT, property tax or wealth tax — in which case the credit was never available and the deduction may be.
  • You already itemize, you have a carryover you will never use because you have no future foreign income, and the year's credit would be largely disallowed by the limitation.

The two directions are not symmetric in time, which is worth knowing if you are amending. You have 10 years to elect the credit or switch to it, under the special limitation period in section 6511(d)(3). Switching the other way, to the deduction, gets only the ordinary 3 years. The asymmetry is deliberate: the law is more willing to let you correct into the credit than out of it.

Source: IRS Publication 514 — Foreign Tax Credit for Individuals — IRC §§ 901(a), 164(a)(3); Pub. 514. Read 2026-09-21.

Claiming it without Form 1116

Four conditions, all of them. The dollar figure is the one everyone quotes and the passive-income condition is the one that disqualifies people.

Section 904(j) lets an individual claim the credit straight on the return, with no Form 1116 and no limitation computation. It is the right answer for a very large number of ordinary investors, and the conditions are cumulative:

All of your foreign source gross income is passive category income — dividends, interest, royalties, annuities and most capital gains.
Catch: This is the condition that catches people. Foreign tax withheld on a salary is general category income, so it fails here no matter how small the amount.
All of that income and the foreign tax paid on it were reported to you on a qualified payee statement — a Form 1099-DIV, 1099-INT, Schedule K-1 or K-3, or an equivalent substitute.
Catch: Tax you worked out yourself from a foreign broker statement that is not a qualified payee statement does not count.
Your total creditable foreign tax for the year is not more than $300, or $600 on a joint return.
You are an individual. The election is not available to an estate or a trust.

Meet all four and you enter the smaller of your total foreign tax or your regular tax on the foreign tax credit line of your return, and you are done. What you give up is the carryover: elect out for a year and any excess for that year is not carried anywhere. Where your foreign tax is close to the $300 ceiling and you expect more next year, the full Form 1116 is often worth the hour.

Source: 26 U.S.C. § 904 — Limitation on credit — IRC § 904(j)(2). Read 2026-09-21.

Credit, treaty or exclusion?

They are three different mechanisms for one problem, they interact, and most people need more than one.

The credit is not the only relief, and choosing between them badly is expensive. In short: a treaty reduces the foreign tax before it is taken, the exclusion removes foreign earned income from the US base entirely, and the credit refunds you for foreign tax after the fact.

Which relief applies to your income
Is the foreign tax being withheld from a payment you have not received yet?
Cut it at source with the treaty rate before it is taken. A refund you never had to ask for beats a credit you have to claim.
→ Form W-8BEN to the payer
Is it foreign earned income — a salary or self-employment profit from working abroad?
The foreign earned income exclusion may remove it from the US base entirely. But you cannot then credit the foreign tax on the excluded part.
→ Form 2555
Has the foreign income tax already been paid, on anything?
The foreign tax credit. It needs no treaty, covers nearly every country and nearly every kind of income, and carries forward ten years.
→ Form 1116, or straight on the return under the $300 election
Is the double charge on social security rather than income tax?
None of the above. A totalization agreement decides which country's system you pay into, and a certificate of coverage proves it.
→ Certificate of coverage
Read top to bottom: the earlier the relief, the better it is for you. Stopping the tax being withheld beats reclaiming it, and reclaiming it beats carrying an unused credit for ten years. Most people abroad end up using more than one of these in the same year.

The interactions are where the money is. Double taxation on foreign income compares all three on the same income. If your relief comes from a treaty rather than the Code, you may also owe a disclosure on Form 8833 — and if the double charge is on social security rather than income tax, the credit is the wrong tool entirely and a totalization agreement is the right one.

Frequently asked questions

What is the foreign tax credit?

A dollar-for-dollar credit against your US income tax for income tax you already paid to another country on the same income. It exists because the United States taxes its citizens and residents on worldwide income, so income earned abroad is taxed twice unless something stops it. The credit is the main thing that stops it — and unlike a treaty, it works whether or not a treaty exists.

How is the foreign tax credit limitation calculated?

Multiply your US tax before the credit by the share of your taxable income that is foreign source. That product is the ceiling; you credit the lesser of it and the foreign tax you actually paid. So a filer with $20,000 of foreign source income out of $100,000 total, and $16,000 of US tax, has a ceiling of $3,200 — 20% of $16,000. The limitation stops you using a high foreign tax rate to wipe out US tax on US income.

Is the foreign tax credit better than the deduction?

Almost always. A credit reduces your tax dollar for dollar; a deduction reduces your income, so it is worth only your marginal rate — a $1,000 foreign tax is worth $1,000 as a credit and about $220 as a deduction at 22%. The deduction is also an itemized deduction, worth nothing unless you itemize, and it has no carryover. It is an all-or-nothing annual choice: you cannot credit some foreign taxes and deduct others in the same year.

Can I claim the foreign tax credit without filing Form 1116?

Yes, if you meet all four conditions in section 904(j): every dollar of your foreign source gross income is passive category income, it was all reported to you on a qualified payee statement such as a 1099-DIV or a K-3, your total creditable foreign tax is no more than $300 ($600 on a joint return), and you are an individual rather than an estate or trust. Foreign tax withheld on a salary is general category income and fails the first condition however small it is.

What happens to foreign tax credit I cannot use this year?

It carries back 1 year and forward 10 years under section 904(c) — eleven years of shelf life in total. The carryback is taken first, on an amended return for the prior year, and only what that year cannot absorb goes forward. Carryovers stay inside their own category, so excess passive credits cannot be used against a general category limitation later.

Can I claim the foreign tax credit and the foreign earned income exclusion?

Not on the same income. If you exclude your salary under the foreign earned income exclusion, the foreign tax on that excluded salary is not creditable and not deductible — you have already had relief for it. You can use both in the same year only where you have income beyond the excluded amount, and then only the tax on the unexcluded part is creditable. This is the single most expensive mistake on an expat return.

Do I need a tax treaty to claim the foreign tax credit?

No, and this is the most useful thing to know about it. The credit is a provision of the Internal Revenue Code and applies to income tax paid to almost any country, treaty or not. Brazil has no income tax treaty with the United States, and a US person taxed in Brazil still claims the credit. A treaty can improve your position by cutting the foreign tax at source or re-sourcing income, but it is not a precondition.

Is foreign VAT or property tax creditable?

No. Only income taxes, war profits taxes and excess profits taxes qualify under section 901. Value added tax, sales tax, property tax, wealth tax and stamp duty are not income taxes and get no credit. Some of them may be deductible if they are business expenses, but that is a different provision — and a foreign tax you could have avoided by claiming a treaty rate and did not claim is not creditable either.

Sources

Every figure on this page was read from a primary source on the date shown. The statute is cited in preference to the publication wherever it states the rule itself.

This page explains the rule and works it in examples; it is not advice on your return. For your own numbers, start with the federal tax calculator and take the limitation computation to a preparer who handles foreign income.

Related

Form 1116
The limitation calculation, the categories, and who can skip the form entirely
Double Taxation on Foreign Income
Treaty, credit or exclusion — which mechanism applies to your income
Tax Treaty Benefits & Country Lookup
Free tool: is there a treaty with your country, what rate, and which form claims it
Form 8833
When you must disclose a treaty position, and what to write on each line
Totalization Agreements
Social security, the second treaty network, and why it covers different countries
Educational information, not tax advice

Every rate and article on this page is cited to the treaty text it comes from, so you or your accountant can check it. Treaty provisions turn on facts we do not know about you — residency, beneficial ownership, limitation-on-benefits conditions and the savings clause can all change the answer. Read the article before you rely on the number, and take advice on anything material.