Form 1116: Claiming the Foreign Tax Credit

Form 1116 is used to claim the Foreign Tax Credit — a dollar-for-dollar reduction in US tax for income taxes paid or accrued to a foreign country. You'll file a separate Form 1116 for each "basket" of income: general income (wages, self-employment), passive income (dividends, interest), foreign branch income, and a few others. The credit is limited to the amount of US tax attributable to the foreign income — you can't use foreign tax credits to reduce US tax on US-source income. Excess credits that can't be used in the current year can be carried back one year or forward ten years. If you don't want to deal with Form 1116, you can take a simpler deduction for foreign taxes on Schedule A — but the deduction is generally less valuable than the credit. Married couples where only one spouse pays foreign taxes must be careful about how they allocate credits between their returns.