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.