When talking about US taxes and taxation of US citizens who live abroad, you may have heard of Foreign Tax Credit. A U.S. citizen or resident alien who pays income taxes in another country can claim a tax credit against their U.S. federal income tax bill. You can offset your US tax liability by claiming the foreign taxes paid to another country. This way, you can bring your tax owing down to zero.
What is Form 1116 and who needs to file it?
You must complete Form 1116 in order to claim the foreign tax credit on your US tax return. The form requests the information about the country your foreign taxes were paid in, the value of foreign taxes paid and the types of income.
Most of the US international tax experts prefer claiming Foreign Tax Credit (Form 1116) on client’s U.S. tax return rather than the Foreign Earned Income Exclusion.
Read further to learn about how to file Form 1116 Foreign Tax Credit and why it is a better way to save money on your US expat taxes.
Related: Foreign Earned Income Exclusion vs. Foreign Tax Credit: which one is better? (Infographics)
Advantages of Foreign Tax Credit and General Rules