How to Fill Out Form 1116: Categories, Limits, and Carryovers

To fill out Form 1116, you sort your foreign income into IRS categories, complete a separate form for each category, report the income and related deductions in Part I, list the foreign taxes paid or accrued in Part II, calculate the credit limitation in Part III, and combine the results in Part IV before carrying the total to Schedule 3 of your Form 1040. The form exists to give you a dollar-for-dollar credit for income taxes you already paid to a foreign government, so the same earnings are not taxed twice. Before you start, check whether you can skip the form entirely.

Check Whether You Even Need the Form

You can claim the foreign tax credit directly on Schedule 3 without filing Form 1116 if all four of these apply: your foreign income was entirely passive (dividends, interest, and similar investment income); the income and taxes were reported to you on a payee statement like a 1099-DIV or 1099-INT; your total creditable foreign taxes were $300 or less, or $600 or less if married filing jointly; and you are not an estate or trust.¹ The trade-off for using the shortcut is that you forfeit any carryback or carryforward of unused credit from that year. Once your foreign taxes exceed those thresholds or you have earned income from abroad, you need the full form.

Decide Between the Credit and the Deduction First

You can take your qualified foreign taxes as a credit on Form 1116 or as an itemized deduction on Schedule A, but not both in the same year, and the choice covers every qualified foreign tax you paid that year.² For most filers, the credit is worth more because it reduces tax dollar-for-dollar instead of reducing taxable income, and you can still take the standard deduction alongside it.

Only foreign income taxes qualify. Property taxes, sales taxes, value-added taxes, and foreign social security contributions to a country covered by a totalization agreement do not, and neither do penalties, interest, or fines.³ Taxes paid to sanctioned countries are also excluded; the IRS list currently includes Iran, North Korea, Sudan, and Syria.⁴

Sort Your Foreign Income Into Categories

Section 904 of the Internal Revenue Code requires you to separate foreign income into categories and figure the credit limit for each one on its own.⁵ Most individuals only deal with two:

Passive category income: dividends, interest, royalties, rents, and capital gains from investments.
General category income: wages, salaries, and active business income that does not fit a specialized basket.

File a separate Form 1116 for each category, check the correct box at the top, and keep every figure on that form limited to income in that basket.¹ Choosing the wrong category is a common error and can cause the IRS to reduce or disallow the credit.

Part I: Foreign Income and Related Deductions

Part I nets your foreign income for the category. Enter gross foreign-source income on line 1a, then subtract deductions that directly relate to earning that income on lines 2 through 5. Line 3b handles deductions that are not tied to any specific income type, such as IRA contributions or student loan interest; you allocate a share to your foreign income using the ratio of foreign income to total income.¹ Skipping this apportionment overstates the foreign income figure and inflates the credit limit.

Enter each foreign country and the currency you paid in. The date of payment or accrual matters because it fixes the tax year the credit applies to, and for taxes paid in foreign currency you generally convert at the spot rate on the payment or withholding date rather than an annual average.⁴⁶

Adjusting Qualified Dividends and Long-Term Capital Gains

Because qualified dividends and long-term capital gains are taxed in the U.S. at 0%, 15%, or 20% instead of ordinary rates, you cannot enter their full amount on line 1a. Reduce the amount first using the IRS adjustment factors:

Qualified dividends taxed at 15%: multiply by 0.4054.
Qualified dividends taxed at 20%: multiply by 0.5405.
Qualified dividends taxed at 0%: do not include them on line 1a at all.

The same factors apply to foreign long-term capital gains through Worksheet B in the Form 1116 instructions.¹ Skip the adjustment and the IRS will recalculate the credit downward.

The High-Tax Kickout

Passive income taxed by a foreign country above the top U.S. rate does not stay in the passive basket. You reclassify it into the category it would otherwise fall into, usually general. On the form, enter “HTKO” on line i of both the passive form and the receiving form, show the income as a negative on the passive form and a positive on the other, and move the related deductions the same way.¹

Part II: Foreign Taxes Paid or Accrued

In Part II, first indicate whether you use the cash method (report taxes in the year you paid them) or the accrual method (report in the year the liability arose).⁴ Most individuals use cash.

Line 8 has a column for each country. Enter the date paid or accrued, the amount in foreign currency, and the converted U.S. dollar amount. If you paid taxes to more than one country in the same category, each country gets its own column. Column (t) totals the taxes across all countries for the category.¹ Recheck your exchange rate conversions; using an annual average when a spot rate is required is a common and easily caught mistake.

Part III: The Credit Limitation

Your credit for each category is capped at the U.S. tax that would apply to that same foreign income. The formula: taxable foreign income (from Part I) divided by total worldwide taxable income, multiplied by your total U.S. tax before credits.⁵

Lines 15 through 23 walk you through it. Line 18 is where any carryover from prior years enters the calculation. Line 19 asks for your total U.S. tax before credits, taken from Form 1040. The category’s allowed credit lands on line 24. If your foreign taxes for that category exceed the limitation, the excess becomes a carryover rather than a lost credit.¹

Part IV: Bringing the Categories Together

If you completed more than one Form 1116, Part IV consolidates them. Lines 25 through 31 each correspond to a category; enter line 24 from each of your forms. Line 32 totals them, and after the final adjustments, line 35 gives you the foreign tax credit that goes on Schedule 3 (Form 1040), line 1.⁷ Taxes paid to sanctioned countries are excluded from this total.

Excess Credits: Schedule B and Carryovers

When creditable foreign taxes exceed the Part III limitation, you can carry the excess back one year or forward up to ten years and apply it in a year that has unused capacity.⁸ Taxes in the Section 951A category (GILTI) cannot be carried back or forward at all.⁹

Track those balances on Schedule B (Form 1116), filed with the main form. Schedule B reconciles the prior-year carryover with the current year’s activity, showing credits used, credits added, and the balance carried forward. You need a separate Schedule B for each category that has a carryover in either the prior or current year.¹⁰ Once the ten-year window closes, any unused balance is gone for good.

If You Also Used the Foreign Earned Income Exclusion

You cannot claim a credit for foreign taxes allocable to income you already excluded under Section 911.¹¹ Reduce the foreign taxes you enter in Part II by the share tied to the excluded wages. If you earned $150,000 abroad, excluded $130,000, and paid $30,000 in foreign tax on the full amount, only the taxes allocable to the remaining $20,000 are eligible for the credit. Missing this adjustment is a reliable way to draw an IRS notice.

Filing and What Errors Cost

Attach Form 1116 to your Form 1040 or 1040-SR.⁷ Tax software bundles it automatically; paper filers place it behind the return and other schedules. The final number from line 35 transfers to Schedule 3 (Form 1040), line 1.¹²

Keep the underlying documents for at least three years after filing, and for the full carryover period if you are tracking unused credit.¹³ That means official foreign tax receipts or withholding statements, records of the payment or accrual date, the exchange rate you used, and the income statements (W-2s, 1099s, Schedule K-3s, or foreign equivalents) supporting each category.

Errors carry real penalties. An accuracy-related underpayment is 20% of the shortfall, and rises to 40% for undisclosed foreign financial asset understatements.¹⁴ A fraudulent claim carries a 75% civil penalty on the entire underpayment and can expose you to criminal prosecution.¹⁵ If your situation involves multiple categories, high-tax kickouts, or old carryovers, a preparer who works with international returns will usually pay for themselves.

1
Internal Revenue Service. Instructions for Form 1116 (2025)
2
Internal Revenue Service. Foreign Tax Credit – Choosing to Take Credit or Deduction
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Internal Revenue Service. Foreign Taxes That Qualify for the Foreign Tax Credit
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Internal Revenue Service. Publication 514 (2025), Foreign Tax Credit for Individuals
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Office of the Law Revision Counsel. 26 USC 904 – Limitation on Credit
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Internal Revenue Service. Yearly Average Currency Exchange Rates
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Internal Revenue Service. Form 1116 – Foreign Tax Credit
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Internal Revenue Service. FTC Carryback and Carryover
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Internal Revenue Service. Topic No. 856, Foreign Tax Credit
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Internal Revenue Service. Instructions for Schedule B (Form 1116)
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Office of the Law Revision Counsel. 26 USC 911 – Citizens or Residents of the United States Living Abroad
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Internal Revenue Service. 2025 Schedule 3 (Form 1040)
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Internal Revenue Service. How Long Should I Keep Records?
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Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
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Office of the Law Revision Counsel. 26 USC 6663 – Imposition of Fraud Penalty