Foreign Tax Credit Limitation Calculator

A professional tool for estimating IRS Form 1116 limitations (IRC §904).

Foreign Tax Credit Estimated Summary

Generated based on user inputs

Step 1: Worldwide Totals (Form 1040)

Line 18 of Form 1116. Total Income minus all Deductions.
Line 20 of Form 1116. Total U.S. tax before credits.

Step 2: Passive Category Income

Step 3: Prior Year Carryovers

Passive Category Only
Total Carryover Available: $0.00

Results

Passive Basket

Foreign Taxable:$0.00
Current Credit:$0.00
Current Year Credit:$0.00
Total Credit Allowed
$0.00

Disclaimer: This tool is for educational and estimation purposes only. It approximates Form 1116 logic but does not replace professional tax software or the advice of a qualified Certified Public Accountant (CPA), Tax Attorney, or Enrolled Agent.

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IRC §904 | Form 1116 | Reg. 1.861-8

Analysis

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Frequently Asked Questions

How is the Foreign Tax Credit Limitation calculated?

The limitation is calculated using the formula: (Foreign Source Taxable Income ÷ Total Worldwide Taxable Income) × U.S. Tax Liability. This ensures you cannot claim a credit greater than the U.S. tax you would have paid on that same income.

Source: 26 U.S. Code § 904(a) - Limitation on Credit

Can I claim both the FEIE and the Foreign Tax Credit?

Yes, but you cannot claim a "double benefit." You cannot take a credit for foreign taxes paid on income that you have already excluded from your U.S. tax return using the Foreign Earned Income Exclusion (FEIE). You can only claim the credit on foreign income above the exclusion amount or on income not eligible for exclusion (like dividends).

Source: IRS: Foreign Tax Credit - Choosing to Take Credit or Deduction | 26 U.S. Code § 911(d)(6)

What happens to unused Foreign Tax Credits?

If your foreign taxes paid exceed the limitation for the year, the excess is not lost. You can carry the unused credit back 1 year (to amend a previous return) and then forward for up to 10 years.

Source: IRS Topic No. 856 Foreign Tax Credit | 26 U.S. Code § 904(c)

Is it better to take the Credit or the Deduction?

For most taxpayers, the Credit is more advantageous because it reduces your U.S. tax liability dollar-for-dollar, whereas a Deduction only reduces your taxable income. Additionally, credits can be carried forward, while deductions cannot.

Source: IRS Publication 514 - Foreign Tax Credit for Individuals

What counts as "Foreign Source Taxable Income"?

The source of income is determined by specific IRS rules. Generally, wages are sourced where the work is performed, dividends are sourced based on where the paying corporation is incorporated, and interest is sourced based on the residence of the payer. This is the "Numerator" in the limitation formula.

Source: IRS Source of Income Rules | 26 U.S. Code § 861 & § 862

What is the "Basket" system?

The IRS prevents you from averaging high-tax active income with low-tax investment income. You must calculate the limit separately for "Passive Category" (investments) and "General Category" (wages/business). You cannot use excess credits from one basket to pay tax in the other.

Source: 26 U.S. Code § 904(d) - Separate Application of Section