IRS 1116 Instructions: Categories, Limit, and Filing Steps

To fill out Form 1116, sort your foreign income into the correct category, convert every foreign amount to U.S. dollars, and run the limitation fraction in Parts I through III to find the credit you are allowed. A separate form goes in for each income category, and the totals flow to Schedule 3 of your 1040. The work is methodical rather than difficult once you know what each part is asking for.

Check Whether You Can Skip the Form Entirely

If your total creditable foreign taxes are $300 or less ($600 on a joint return), you can claim the credit directly on Schedule 3 without filing Form 1116. The shortcut only works if every dollar of your foreign-source income is passive category income (dividends, interest, and similar investment income), all of it was reported on a payee statement like a 1099-DIV or 1099-INT, and you meet every other requirement for the exemption.¹ Any wages, self-employment income, or other active foreign earnings put you back on the full form no matter how small the tax was.

Confirm Your Foreign Taxes Qualify

Only foreign income taxes count. The tax must be a levy on net income imposed by a foreign country or U.S. possession.² Value-added taxes, foreign sales taxes, and foreign property taxes do not qualify.

A few categories of foreign income tax are also excluded even though they are income taxes:

Taxes on income you shielded with the foreign earned income exclusion.
Foreign social security taxes paid to a country that has a totalization agreement with the United States.
Taxes paid to countries designated under Section 901(j). For 2025 that list is Iran, North Korea, Syria, Sudan, and Libya, with limited exceptions for Libya.³
Withholding on dividends from stock you held fewer than 16 days (46 days for preferred stock), and similar short-hold withholding on other property.

The IRS keeps a full list of disqualified taxes on its international taxpayer pages.⁴ Taxes paid to sanctioned countries cannot be credited but may be taken as an itemized deduction on Schedule A instead.

Pick the Right Income Category

Form 1116 asks you to separate foreign income and the related taxes into “baskets.” You file a separate Form 1116 for each category that applies, because the credit limitation is calculated independently for each one.⁵ The category you check at the top of Part I drives everything below it.

Passive Category Income

This is the basket most individual filers use. It covers foreign dividends, interest, royalties, rents, annuities, and capital gains on assets outside an active business.⁶ International mutual fund distributions and foreign stock withholding usually land here.

One wrinkle: if the foreign tax rate on a particular item of passive income exceeds the highest U.S. individual rate, that income gets bumped into the general category under the high-tax kick-out rule.⁷

General Category Income

General category income is the catch-all for active earnings. Wages earned abroad, self-employment income from foreign services, and income from manufacturing or selling goods overseas belong here.⁶ Kicked-out high-tax passive income also lands in this basket.

The Other Baskets

Three additional categories affect fewer individual filers: Section 951A (GILTI) income for U.S. shareholders of certain controlled foreign corporations; foreign branch income attributable to a qualified business unit operating abroad, which excludes any passive category income; and treaty-resourced income that a tax treaty reassigns between U.S. and foreign source.⁸ A separate basket also exists for certain lump-sum distributions from foreign trusts or pension plans.

Choose Paid or Accrued in Part II

You report foreign taxes either in the year you paid them (cash) or the year you owed them (accrual). Most individuals use the cash method by default. To switch to accrual you check the box in Part II on a timely filed original return, and that choice is permanent: once elected, accrual applies to all foreign taxes in every future year, and you cannot mix methods within a single year.⁹

Convert Everything to U.S. Dollars

All income and tax amounts on Form 1116 have to be in U.S. dollars. Cash-method filers convert taxes at the exchange rate in effect on the date they were paid; withholding taxes use the rate on the date the tax was withheld.³

Accrual-method filers generally use the average exchange rate for the tax year the taxes relate to, provided the taxes are paid within 24 months after that year closes and the currency is not inflationary. Accrual filers can elect to use the rate on the actual payment date instead, and that election applies going forward once made.³

There is one useful shortcut. If the foreign tax was already reported to you in U.S. dollars on a 1099-DIV or 1099-INT, use that figure directly and enter “1099 taxes” in the date column of Part II.⁸

Work the Limit Fraction in Parts I and III

Your credit for a category cannot exceed the slice of U.S. tax that corresponds to your foreign income in that category. The form walks you through the math, which reduces to one fraction:⁵

Credit Limit = (Foreign source taxable income in the category ÷ Worldwide taxable income) × U.S. tax before credits

The numerator is your net foreign-source taxable income for that specific category. Part I is where you build it: start with gross foreign income at the top, then allocate and apportion deductions against it further down. The standard deduction or itemized deductions come in, along with any expenses directly tied to earning the foreign income.⁶ What comes out the bottom of Part I feeds the numerator.

The denominator is your total worldwide taxable income from Form 1040. Part III multiplies the resulting ratio by your pre-credit U.S. tax to produce the limit. Your credit for the category is the lesser of that limit or the foreign taxes you paid or accrued in it. If you filed multiple 1116s, each produces its own limit, and the totals combine into the single credit amount that goes on your return.

Handle Foreign Taxes Above the Limit

If your creditable foreign taxes exceed the limit in a category, the excess is not lost. Under Section 904(c), unused foreign taxes carry back to the immediately preceding tax year first, then forward to each of the next ten tax years in order until absorbed. Excess taxes stay within their original category, so passive-basket excess can only offset passive-basket limits in other years. Excess taxes in the Section 951A (GILTI) category cannot be carried back or forward at all.⁷ Use Schedule B of Form 1116 to track carrybacks and carryforwards.

Coordinate with the Foreign Earned Income Exclusion

If you claim the foreign earned income exclusion on Form 2555, you cannot also claim a foreign tax credit on the income you excluded.¹⁰ Earnings above the exclusion amount can still support a credit, but you have to split the foreign taxes between excluded and non-excluded income using a fraction: excluded income (minus allocable deductions) over total foreign earned income (minus allocable deductions plus the housing deduction).¹¹

Getting this wrong is expensive. Claiming a credit on income you excluded (or could have excluded) is treated as revoking your exclusion election starting in the year of the improper credit, which can trigger a much larger tax bill than the credit was worth.¹⁰

File, Attach, and Keep the Records

Attach each completed Form 1116 to your Form 1040 or 1040-SR. When you filed forms for multiple categories, the credits combine into a single amount on your return. If you owe alternative minimum tax, a separate foreign tax credit calculation feeds into Form 6251, drawing on your 1116 figures.⁸

Records need to last longer than the usual three years.¹² The foreign tax credit carries a 10-year refund-claim window if you later discover you paid or accrued more creditable foreign taxes than you originally claimed.⁶ If you have unused credits carrying forward, hold onto the 1116 copies, foreign tax receipts, and calculation worksheets for the entire carryforward period plus three years, because without them a carryover is nearly impossible to substantiate on audit.

1
Internal Revenue Service. Foreign Tax Credit – How to Figure the Credit
2
Office of the Law Revision Counsel. 26 USC 901 – Taxes of Foreign Countries and of Possessions of the United States
3
Internal Revenue Service. Publication 514 (2025), Foreign Tax Credit for Individuals
4
Internal Revenue Service. Foreign Taxes That Qualify for the Foreign Tax Credit
5
Internal Revenue Service. Form 1116 – Foreign Tax Credit (Individual, Estate, or Trust)
6
Internal Revenue Service. Foreign Tax Credit
7
Office of the Law Revision Counsel. 26 USC 904 – Limitation on Credit
8
Internal Revenue Service. Instructions for Form 1116 (2025)
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Internal Revenue Service. Foreign Tax Credit – Choosing to Take Credit or Deduction
10
Internal Revenue Service. Choosing the Foreign Earned Income Exclusion
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Internal Revenue Service. Foreign Earned Income Exclusion Adjustment
12
Internal Revenue Service. How Long Should I Keep Records