Guide
Form 1116: the foreign tax credit
Credit for tax already paid abroad, set against the US liability on the same income — usually the stronger relief for anyone in the UK.
Tax paid once, credited against the second bill.
The foreign tax credit reduces your US tax by the foreign tax you already paid on the same income. Where the foreign rate is higher, the US liability commonly falls to nothing.
Unlike the exclusion it covers unearned income too, and unused credit can be carried backward one year and forward ten.
At a glance
- Form
- Form 1116, one per income category
- Covers
- Most foreign income, earned and unearned
- Carryover
- Back one year, forward ten
- Limit
- Credit cannot exceed the US tax on that category of foreign income
- Categories
- General, passive and others are computed separately and do not offset each other
In detail
01
Baskets
Income is separated into categories and each is limited on its own. Excess credit in one basket cannot relieve tax in another, which is why the split matters.
02
Paid or accrued
You elect to claim on a paid or accrued basis. With mismatched tax years — the UK to 5 April, the US to 31 December — the choice affects timing considerably.
03
Which taxes qualify
Income taxes generally do. National Insurance and similar social security contributions generally do not, being dealt with by the totalisation agreement instead.
04
Building carryover
At UK rates most people generate more credit than they can use, and the surplus carries forward. It becomes valuable in a year with US-source income or a lower UK charge.
Credit for tax already paid abroad, set against the US liability on the same income — usually the stronger relief for anyone in the UK.
Frequently asked
Do I need Form 1116 for a small amount?
There is a de minimis route allowing a credit to be claimed directly on the return without the form, subject to limits and only for passive income with the right paperwork.
Can I claim credit for UK tax on my pension?
Often, though the treaty may give one country the exclusive right to tax it, in which case the analysis is about allocation rather than credit.
What if the UK tax year straddles the US one?
This is the core difficulty. The accrual election and careful apportionment are how it is handled, and consistency between years matters more than the specific approach.
This guide is general information, not advice for your circumstances. Cross-border tax turns on detail, and the right answer for someone with a similar situation may not be the right answer for you. Talk to us before acting on anything here.
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