What is the foreign tax credit?

A dollar-for-dollar credit for foreign income taxes you paid on income that is also subject to U.S. tax. It prevents double taxation — you credit the foreign tax against your U.S. tax bill, rather than deducting it as an expense.

Who can claim the foreign tax credit?

U.S. citizens and resident aliens who paid foreign income taxes — typically from foreign employment, foreign investments, or foreign-sourced income. It is reported on Form 1116 (or taken directly for small amounts under a threshold).

Foreign Tax Credit: How It Stops You Being Taxed Twice

What the Foreign Tax Credit Is

The foreign tax credit (FTC) is a dollar-for-dollar credit for income taxes you paid to a foreign country on income that's also taxable in the U.S. It's the main mechanism the U.S. uses to avoid double taxation of its citizens and residents who have foreign income.

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Who It Helps

Expats and foreign workers — U.S. citizens or residents working abroad who pay foreign income tax.
Foreign investors — holding foreign stocks or funds where the foreign country withheld tax on dividends.
Anyone with foreign-sourced income — rental income abroad, foreign royalties, etc.

How It Works

Say you earned foreign income and paid $2,000 in foreign income tax on it, and that same income generates $5,000 of U.S. tax. The foreign tax credit lets you subtract that $2,000 directly from your U.S. tax — leaving you owing $3,000 instead of $5,000. It's a credit (dollar for dollar), not a deduction (which only reduces taxable income), so it's far more valuable.

The Key Rules

The credit is limited — you can't credit more than the U.S. tax attributable to that foreign income. It prevents using foreign tax to wipe out U.S. tax on domestic income.
You choose credit or deduction — you can't take both for the same foreign taxes. The credit is almost always better.
Unused credit carries — excess foreign tax credit can carry back one year and forward up to ten years.
Small amounts — under a threshold (roughly $300 single / $600 joint of foreign tax), you can claim the credit directly without Form 1116.

Frequently Asked Questions

Do I need the foreign tax credit if I use the foreign earned income exclusion?

Possibly not for the same income — the exclusion and the credit can't be double-counted on the same dollars. But you may still use the credit for foreign taxes on income not covered by the exclusion.

Do foreign dividends automatically qualify?

Generally yes — foreign taxes withheld on dividends reported on your 1099 can usually be credited, subject to the limits. Your brokerage statement will show the foreign tax paid.

Is the credit better than the deduction?

Almost always. A credit reduces your tax dollar-for-dollar, while a deduction only reduces your taxable income. Take the credit unless a specific reason makes the deduction work better.

What form do I file?

Form 1116 for most cases. Small amounts of foreign tax (under the threshold) can be claimed directly on your return without Form 1116.

Sources

IRS — Foreign Tax Credit (Form 1116) rules.
IRS Publication 514 — Foreign Tax Credit for Individuals.
IRS — foreign earned income exclusion vs credit.

This is informational, not tax advice. The FTC is complex and fact-specific.