In this guide
What the FTC is, in plain English
The Foreign Tax Credit (FTC) is a U.S. tax credit that reduces your U.S. income tax dollar-for-dollar for income taxes you have already paid to a foreign government. Its purpose is to prevent the same dollar of income from being taxed twice — once by the country where you earned it, and once by the U.S.
The FTC is claimed on Form 1116 (Foreign Tax Credit — Individual, Estate, or Trust), filed with your 1040. Under a de minimis exception, taxpayers with $300 or less in foreign taxes ($600 married filing jointly) and only passive 1099-reported foreign income may be able to claim the credit directly on Schedule 3 without Form 1116.
How Form 1116 works
Form 1116 walks you through four steps:
- Identify foreign-source income by income category (passive, general, or one of a few special baskets).
- Identify foreign taxes paid or accrued on that income, in U.S. dollars.
- Compute the limitation — the most U.S. tax the FTC can offset for that category, based on the ratio of foreign-source to total taxable income.
- Claim the smaller of (foreign taxes paid) or (the limitation).
The math is mechanical, but it has traps. The most common one is mixing income categories — interest income (passive basket) cannot be offset by foreign taxes paid on salary (general basket). The form forces a separate Form 1116 per category.
When FTC is better than FEIE
The FEIE and the FTC are different tools doing different jobs. FEIE removes income from U.S. taxable income before tax is calculated; FTC credits foreign taxes paid against U.S. tax that is already calculated. Each wins in different scenarios.
The FTC is generally the better choice when:
- You live in a higher-tax country. Foreign taxes paid usually exceed what U.S. tax would have been on the same income, so the FTC fully offsets U.S. tax and may generate carryforward credit. Germany, UK, France, Canada, Australia, the Nordics typically fall here.
- You want to preserve the Child Tax Credit. FEIE-excluded income generally does not generate refundable CTC. FTC preserves the U.S. tax base, which means refundable CTC can still flow.
- You have meaningful passive income. FEIE only covers earned income. FTC covers passive, general, and other categories — capturing taxes on foreign dividends, interest, rental income.
- You expect to lose FEIE eligibility in the future. Once you revoke FEIE, you cannot re-elect for 5 years without IRS consent. Starting on FTC avoids that lockout.
- You want carryforward capacity. Excess FTC carries back 1 year and forward 10 years. FEIE has no equivalent — it is "use it or lose it" annually.
For the full side-by-side comparison see FEIE vs FTC, and use the FEIE vs FTC Calculator to model your own numbers.
Using FTC alongside FEIE
You can use both in the same year, but not on the same dollars of income. The typical stack:
- FEIE excludes the first $132,900 of foreign earned income (2026 limit; $130,000 for 2025).
- FTC credits foreign taxes paid on income above that limit, on passive foreign income, or on any income FEIE does not cover.
The stacking strategy can be more complex than either tool alone — but in mid-to-high-tax countries with significant earned income above the FEIE limit, it is often the optimal combination.
Carryback and carryforward
If your foreign taxes paid in a category exceed the U.S. tax limitation for that category, the excess credit is preserved:
- Carryback: 1 year. The IRS will recompute the prior year's tax with the excess credit applied. This is useful if you had U.S. tax owed last year on the same category of income.
- Carryforward: 10 years. The excess credit sits available for any of the next 10 years' returns in the same category basket.
The catch: carryforward is by category. Excess general-category credit cannot be used against future passive-category tax. Tracking the buckets is essential, and it is one of the spots where good software (or a CPA who actually models this) earns its fee.
Income category baskets
Form 1116 requires foreign income and foreign taxes to be split by category. The two that matter for most expats:
- Passive category income — interest, dividends, capital gains, rental income, royalties.
- General category income — wages, salary, self-employment income, business income.
A handful of other baskets exist (Section 901(j), certain re-sourced by treaty, lump-sum distributions, etc.) but they are rare for typical expats.
The limitation formula
The FTC is capped at the amount of U.S. tax that would otherwise apply to your foreign-source income in each category. Form 1116 computes this as roughly:
The practical effect: in a country where foreign tax rates exceed U.S. rates, the FTC will not offset all foreign tax paid — but the excess carries forward. In a country where foreign tax rates are lower than U.S. rates, the FTC offsets every dollar of foreign tax and you owe the difference to the U.S.
Common expat FTC mistakes
- Mixing categories. Filing one Form 1116 with both salary and interest mashed together. The IRS will recompute and reduce the credit.
- Claiming taxes that aren't creditable. Foreign VAT, sales tax, social security contributions, and "voluntary" taxes are generally not creditable. Only legal, actual income tax (or a tax paid in lieu of income tax) qualifies.
- Using the wrong exchange rate. Foreign taxes must be converted to U.S. dollars at the rate when paid (or accrued, if you elect that method) — not the year-end rate.
- Letting carryovers expire. A 10-year clock that no one tracks. Software that does not migrate prior-year FTC carryforwards is a real risk for expats who switch products.
- Forgetting passive income from a foreign brokerage. Foreign dividend withholding is creditable but easy to miss if you do not have a clean 1099-equivalent statement.
How FTC plays out across countries
FTC efficacy is almost entirely a function of the local tax rate. A few illustrative country profiles:
- 🇬🇧 United Kingdom — high tax. FTC almost always wins for salaried expats. See UK expat tax guide.
- 🇨🇦 Canada — high tax with strong U.S. integration. FTC usually wins; cross-border specialists earn their fee here. See Canada expat tax guide.
- 🇩🇪 Germany — high tax + totalization agreement. FTC usually wins, and SE tax is handled by the agreement. See Germany expat tax guide.
- 🇦🇪 UAE — no personal income tax. FTC is largely irrelevant — there are no foreign taxes to credit. FEIE wins. See UAE expat tax guide.
- 🇶🇦 Qatar — same as UAE. FEIE country, FTC not applicable on local salary. See Qatar expat tax guide.
- 🇮🇳 India — moderate to high tax with rate-bracket variation. FTC frequently wins for senior professionals. See India expat tax guide.
Frequently asked questions
What is the Foreign Tax Credit?
A U.S. tax credit that gives you a dollar-for-dollar reduction in your U.S. income tax for income taxes already paid to a foreign government. Claimed on Form 1116.
When is the FTC better than the FEIE?
Usually in higher-tax countries (Germany, UK, Canada, Australia, France), when you have meaningful passive income, when you want to preserve the refundable Child Tax Credit, or when you may not qualify for FEIE in future years.
Can I carry forward unused FTC?
Yes — generally back 1 year and forward 10 years, within the same income category basket.
Which form do I file for the Foreign Tax Credit?
Form 1116 in most cases. A de minimis exception lets you claim small amounts of foreign tax (≤$300 single, ≤$600 MFJ) on Schedule 3 without Form 1116 when all foreign income is passive 1099-reported.
Can I use both FEIE and FTC in the same year?
Yes, but not on the same dollars. Use FEIE on the first $132,900 of foreign earned income (2026), then FTC on income above that, on passive income, and on anything FEIE doesn't cover.
What is the FTC limitation?
The FTC is capped at the amount of U.S. tax that would otherwise be owed on the foreign-source income in each category. Excess credit carries back or forward — see the carryovers section above.
