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FBAR & International Tax Resource Center

Foreign tax credit on Form 1116: avoiding double tax

US citizens and residents pay US tax on worldwide income, but the foreign tax credit usually prevents paying full tax twice on the same income.

Updated November 2026 · VG CPA PC advisors

How the credit works

The credit reduces US tax dollar for dollar for income taxes paid or accrued to a foreign country, limited to the US tax on your foreign-source income. It is figured separately for categories, mainly passive income (interest, dividends, many gains) and general income (wages, business income).

Only taxes you were legally required to pay qualify. If the foreign tax withheld exceeds the final foreign liability, the excess must be recovered through a foreign refund, not credited in the US.

Simplified election and limits

If your creditable foreign taxes are $300 or less ($600 joint) and all passive, you can claim the credit without Form 1116. Otherwise, Form 1116 computes the limit for each category.

Unused credits can generally be carried back one year and forward ten years. You can also choose to deduct foreign taxes instead of crediting them, though the credit is usually better.

Timing and treaties

Countries with different tax years, such as India's April-to-March year, create timing issues. Taxpayers using the cash method can elect to claim credits when taxes accrue, which often lines them up with the income.

Tax treaties set rules for which country can tax certain income first and may provide resourcing rules that let you claim credits you would otherwise lose.

Questions

Frequently asked questions

Can I credit Indian TDS on fixed deposit interest?

Yes, to the extent it reflects tax actually owed to India on that interest.

Should I use the foreign earned income exclusion instead?

For people living abroad, compare both. Income excluded cannot also generate a credit.

Do state taxes allow a foreign tax credit?

Most states do not, so foreign income may be taxed by both the state and the foreign country.

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General information based on federal law as of the date above, not advice for your situation. Please speak with an advisor before acting.

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