Foreign Tax Credit Carryover Rules: How Excess Credits Work

If your foreign taxes paid exceed the US tax limitation on Form 1116 for a given year, you have excess foreign tax credits that cannot be used in that year. The carryover rules let you carry unused credits back one year to the prior tax year and carry them forward up to ten years to offset future US tax on foreign income in the same income basket. The most common reason expats end up with excess credits is that their foreign tax rate exceeds the effective US rate on the same income, which happens regularly in high-tax countries like Germany, France, and the Scandinavian countries. To use the carryback, you file an amended return for the prior year; to use credits carried forward, you claim them on Form 1116 in a future year when you have US tax in the passive or general income basket to offset. Expats who move between high-tax and low-tax countries over their working lives can benefit significantly from tracking and strategically timing when they use carryforward credits.