Olivier Wagner - Form 1116
What Is Form 1116 And Who Needs To File It?

When talking about US taxes and taxation of US citizens who live abroad, you may have heard of Foreign Tax Credit and the possibility to offset the US tax owing by using the taxes paid to another country. That way you can narrow the tax owing down to zero!

Most of the US international tax experts prefer claiming Foreign Tax Credit (Form 1116) on client’s U.S. tax return rather than preparing form 2555 (Foreign Earned Income Exclusion), since it is more beneficial. Read further to learn why FTC is a better way to save money on your US expat taxes.

Here are 5 quick facts about IRS Form 1116 and US tax returns:

  1. You claim Foreign Tax Credit on your US expat taxes by filing Form 1116
  2. You attach this form to a Form 1040, your individual US tax return
  3. The credit reduces your US tax liability on expat income dollar for dollar
  4. You cannot take Foreign Tax Credit against income which you have previously excluded by the Foreign Earned Income Exclusion
  5. And you can’t receive a refund of foreign taxes paid through your US tax return

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Virtual Tax Advisor

Although Form 1116 is a great benefit, there are some limitations to this tax credit that you should be aware of.

  1. The money earned needs to be subject to income tax in the foreign country. Unfortunately, you cannot use the credit to offset the cost of the property or other taxes paid abroad. Income only!
  2. The credit can be up to the amount you paid the foreign country. However, it is limited to no more than the percentage of your income that was earned overseas. So if you only earned 40% of your income in a foreign country that was subject to taxation abroad, then you cannot take a deduction equal to more than 40% of your U.S. tax burden.
Look At Expat Example Using Foreign Tax Credit

Mark and Sylvia have been living and working in Spain for three years. They are full-time residents and earn all of their foreign earned income through the Spanish companies they work for (perhaps, you can relate to this example of how to claim the Foreign Tax Credit):

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