How Much Is the Foreign Tax Credit? Limit, Carryover, and AMT

The foreign tax credit limit caps your credit at the portion of your U.S. tax that corresponds to your foreign income. The formula is your foreign-source taxable income divided by your total worldwide taxable income, multiplied by your U.S. tax liability before the credit.¹ Whatever that fraction produces is the ceiling. Foreign taxes above it can’t offset U.S. tax on income you earned inside the United States, no matter how much you paid abroad.²

A Worked Example

Say your total taxable income is $100,000, of which $20,000 came from foreign sources, and your U.S. tax before the credit is $15,000. Your limit is ($20,000 ÷ $100,000) × $15,000, or $3,000. If you paid $4,500 in foreign income tax, you can claim $3,000 this year. The remaining $1,500 doesn’t vanish, but it doesn’t come off this year’s return either.³

The Limit Is Calculated Separately for Each Category

There isn’t one limit for all your foreign income. You run the calculation once for each category, and each category has its own ceiling. The two categories most individuals encounter are passive (dividends, interest, royalties, similar investment income) and general (wages and active business income). If you have both, you file a separate Form 1116 for each and compute a separate limit for each.⁴

Keeping the categories apart stops high-taxed income in one bucket from soaking up credit capacity that belongs to another.

The High-Tax Kickout

One wrinkle inside the passive category. If a foreign country taxes your passive income at a rate higher than the top U.S. rate on that same income, the IRS reclassifies that income as general category rather than passive. On Form 1116 you back it out of the passive form as a negative labeled “HTKO” and add it as a positive on the general form.⁵⁴ The effect on your limit: heavily taxed passive earnings stop inflating the passive category ceiling and no longer shelter lightly taxed passive income from U.S. tax.

Which Foreign Taxes Feed Into the Calculation

Only foreign income taxes (and their equivalents on war profits or excess profits) count. The payment has to be compulsory and can’t be a fee for a specific economic benefit like mineral rights. Amounts a foreign government later refunds or channels back to you as a subsidy are excluded.⁶

Several taxes people commonly pay abroad don’t qualify at all, so they don’t enter the limit calculation:

Value-added taxes and sales taxes, because they tax consumption rather than income.⁷
Foreign property taxes, for the same reason.⁷
Foreign social security taxes, which are addressed through totalization agreements between the U.S. and other countries.⁸

What Happens to Foreign Taxes Above the Limit

Excess credits carry. You can carry the unused amount back one year, then forward for up to ten, and apply it in any year where your limit for that year exceeds the foreign taxes already credited.¹

Back to the $1,500 leftover from the example. You’d first check the prior year for unused capacity. Anything still stranded rolls forward year by year. Carryover amounts can only be used as a credit, and only in a year when you actually elect the foreign tax credit rather than deducting foreign taxes instead.²

The De Minimis Shortcut

Small amounts don’t require the limit calculation at all. If your total creditable foreign taxes are $300 or less ($600 or less on a joint return), you can skip Form 1116 and enter the credit directly on Schedule 3. This only works if all your foreign-source income is passive category and was reported to you on a qualified payee statement such as Form 1099-DIV or Form 1099-INT.⁴

There’s a cost to the shortcut. In a year you use the de minimis election, you create no carryback or carryforward. Existing carryovers from other years still apply, but nothing new is generated.⁴

Interaction With the Foreign Earned Income Exclusion

If you exclude foreign wages using the foreign earned income exclusion on Form 2555, the foreign taxes you paid on that excluded income are not creditable. The exclusion and the credit can’t cover the same dollars.⁹ For limit purposes this matters two ways: excluded income doesn’t sit in the numerator of the fraction, and the tax paid on it doesn’t count toward what you’re trying to credit.

Switching directions carries a lock-in. If you revoke the foreign earned income exclusion and want to elect it again within five tax years, you have to apply to the IRS for permission through a private letter ruling, with a fee. The IRS weighs factors like whether you moved back to the U.S. or relocated to a country with a different tax rate.¹⁰

A Separate Limit for the Alternative Minimum Tax

If you owe alternative minimum tax, there’s a parallel AMT foreign tax credit against your AMT liability. It uses the same fraction, but with AMT versions of the income and tax figures throughout.¹¹

If you took the de minimis election for the regular credit, your AMT credit equals that same amount. If you filed Form 1116, you’ll complete an AMT version using AMT-allowed income and deductions. Using the de minimis approach also blocks AMT credit carryovers.¹¹

If You Missed Claiming the Credit

The refund window for foreign tax credit claims runs ten years from the due date of the return for the year the foreign taxes were paid or accrued, rather than the ordinary three years for most refund claims.¹² Foreign tax obligations can take years to settle, and the longer window gives you room to amend once the foreign tax is final.

1
Office of the Law Revision Counsel. 26 U.S. Code 904 – Limitation on Credit
2
Internal Revenue Service. Foreign Tax Credit – How to Figure the Credit
3
Internal Revenue Service. FTC Limitation and Computation
4
Internal Revenue Service. Instructions for Form 1116 (2025)
5
Internal Revenue Service. Publication 514 (2025), Foreign Tax Credit for Individuals
6
Office of the Law Revision Counsel. 26 U.S.C. 901 – Taxes of Foreign Countries and of Possessions of United States
7
Internal Revenue Service. Am I Eligible to Claim the Foreign Tax Credit?
8
Internal Revenue Service. Totalization Agreements
9
Internal Revenue Service. Foreign Tax Credit
10
Internal Revenue Service. Revoking Your Choice to Exclude Foreign Earned Income
11
IRS.gov. 2025 Instructions for Form 6251 – Alternative Minimum Tax – Individuals
12
Office of the Law Revision Counsel. 26 U.S. Code 6511 – Limitations on Credit or Refund