What this line means
The credit for income taxes you paid or accrued to a foreign country or U.S. possession. This credit directly reduces your U.S. tax liability dollar-for-dollar, up to the limit calculated on Form 1116. If the foreign taxes you paid are $300 or less ($600 for married filing jointly) and all foreign income is passive category income reported on a payee statement, you can claim the credit directly on this line without filing Form 1116.
Does this apply to you?
- You earned dividends or interest from foreign stocks or mutual funds that hold foreign securities, and foreign taxes were withheld
- You worked in a foreign country and paid income taxes to that country’s government
- You received income from a foreign partnership, S corporation, or trust that passed through foreign tax credits to you
- You paid taxes to a U.S. territory such as Puerto Rico, Guam, or the U.S. Virgin Islands
Easy to overlook
The credit is almost always better than the deduction You can choose to deduct foreign taxes on Schedule A instead of claiming the credit on Schedule 3. The deduction reduces your taxable income; the credit reduces your tax dollar-for-dollar. 1 For a filer in the 22% bracket who paid $500 in foreign taxes, the deduction saves $110, but the credit saves $500. The credit wins in virtually every scenario. Filers who itemize sometimes default to the deduction without comparing. IRS Form 1116 Instructions — Foreign Tax Credit
Foreign taxes withheld from mutual fund dividends are easy to miss Your brokerage reports foreign taxes paid in Box 7 of Form 1099-DIV. If you hold international index funds or foreign stock funds, foreign governments withheld taxes on the dividends before they reached your account. 2 These amounts are often small — $50 to $200 — but they add up across multiple funds. The 1099-DIV shows the amount; you claim it here. General filing pattern — foreign tax credit vs. deduction choice
Watch out for this
Claiming the full amount of foreign taxes paid without calculating the Form 1116 limit. The credit cannot exceed the portion of your U.S. tax that corresponds to your foreign-source income relative to your total income. If your foreign income is 10% of your total income, the credit is limited to 10% of your U.S. tax liability. Claiming the full amount without this calculation triggers a math error notice.
Footnotes
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IRS Form 1116 Instructions, Choosing to Take Credit or Deduction. https://www.irs.gov/instructions/i1116 ↩
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IRS Publication 514, Foreign Tax Credit for Individuals. https://www.irs.gov/pub/irs-pdf/p514.pdf ↩