Foreign tax credit carryover: A comprehensive guide for US expats
The foreign tax credit carryover allows US taxpayers to apply unused foreign tax credits to offset future US tax liability. Excess credits can be carried forward 10 years or back 1 year. This prevents loss of valuable tax benefits when foreign taxes paid exceed US tax liability in a given year.
For expats, it is often the difference between losing credits and keeping them available for a later year when your US tax is higher. If you are wondering, ‘what is foreign tax credit carryover?’ This guide keeps it practical and IRS-focused.
What is the foreign tax credit carryover?
Foreign tax credit carryover is an IRS provision allowing taxpayers to use unused foreign tax credits from previous years. When foreign taxes paid exceed the foreign tax credit limitation, the excess can be carried forward 10 years or back 1 year (carryover period – 10 years). Credits must be tracked separately for general and passive income categories.
The foreign tax credit is designed to make sure that you're not taxed twice on the same income – once by the foreign government and again by the US.
To utilize carryover, file Form 1116 annually with Schedule B tracking prior-year credits. Each income category (general/passive) requires a separate Form 1116.
Also read. Foreign earned income exclusion – FEIE
General vs passive income categories
IRS requires separating foreign tax credits into a general category (wages, business income) and a passive category (dividends, interest, rent). Each category has independent carryover tracking, separate Form 1116 filing, and distinct FTC limitation calculations.
| General category income | Passive category income foreign tax credit |
|---|---|
| wages from foreign employment, self-employment income, active business income – file Form 1116 for the general category | dividends from foreign stocks, interest from foreign accounts, rental income, royalties – file a separate Form 1116 |
- Why it matters: Credits cannot move between categories. Maintain separate 10-year schedules for each.
- Planning tip: Match your tracking to your expected income mix.
When and how to use foreign tax carryover?
Use carryover when foreign taxes paid exceed the FTC limitation. Common in high-tax countries (UK, Germany, France) or with passive income taxed abroad at higher rates than the US equivalent rates.
You can use foreign tax carryover in the following situations:
- Excess foreign taxes paid: If your foreign tax liability is higher than your US tax liability, the foreign tax carryover allows you to use the extra credit in subsequent years.
- Passive income: For US taxpayers with passive income from abroad, you can use foreign tax carryover credits to offset taxes on income like foreign dividends, interest, or rental income.
To use the carryover, you’ll need to file Form 1116 every year, ensuring that unused credits are applied properly up to the FTC limitation. The FTC limitation is why excess foreign taxes turn into carryovers instead of being usable right away.
If you are considering switching from FTC to FEIE in a future year, first test your physical presence qualification to confirm you actually meet the 330-day standard.
How to calculate your foreign tax credit carryover
To calculate the FTC limitation:
(Foreign Income ÷ Worldwide Income) x US Tax Liability.
Compare to foreign taxes paid. An excess amount is carried over. Must calculate separately for general and passive categories on separate Form 1116s.
Here is the FTC limitation formula in plain terms: you are finding the share of your US tax that relates to foreign-source income. If your creditable foreign taxes are higher than that limit, the difference becomes your carryover.
Example 1 – Form 1116 calculation example (general category)
US expat in the UK earning $100,000 wages. UK taxes paid: $28,000. Worldwide income: $120,000. US tax: $24,000.
FTC Limitation = ($100,000 ÷ $120,000) × $24,000 = $20,000.
Foreign taxes ($28,000) > limit ($20,000).
Carryover: $8,000.
Example 2 – foreign tax credit calculation (passive category)
Foreign dividends: $10,000. Foreign withholding: $2,500 (25%). Worldwide income: $150,000. US tax: $30,000.
FTC Limitation = ($10,000 ÷ $150,000) × $30,000 = $2,000.
Foreign taxes ($2,500) > limit ($2,000).
Carryover: $500.
Foreign tax credit carryback: When and how to use it
Foreign tax credit carryback allows applying unused credits to the previous tax year by filing Form 1040-X (amended return). Carryback is limited to 1 year and is optional. It can generate a tax refund if the prior year had a higher US tax liability than the foreign credits used.
Best for: The prior year had high US tax, the current year has excess credits, and you need an immediate refund rather than a 10-year wait.
Example: Year 1 paid minimal foreign tax but had a US tax liability. Year 2 paid substantial foreign tax. Carry back of foreign tax credit Year 2 excess to Year 1 for refund.
How to claim
- File Form 1040-X – Amend the prior-year return where the foreign tax credit carryback will be applied.
- Attach a revised Form 1116 – Show the foreign tax credit carryback applied to that year under IRC §904(c).
- Include a brief statement – For example: Applying FTC carryback from [year] per IRC 904(c).
- Submit to the IRS – You may e-file Form 1040-X for the current or two prior tax years; otherwise, mail the amended return.
- Wait for processing – IRS processing typically takes 8–12 weeks; any unused credit carries forward for up to 10 years.
Carryback vs Carryforward
| Feature | Carryback | Carryforward |
|---|---|---|
| Period | 1 year prior | 10 years in the future |
| Filing | Form 1040-X (amended) | Form 1116 (annual) |
| Refund potential | Yes | No |
| Best for | Prior year high US tax | Ongoing foreign income |
NOTE! Most use carryforward: automatic, simpler, 10-year usage window. Carryback / carry back requires an amended return but can generate an immediate refund.
Foreign tax credit carryforward period
Carry-forward period is 10 years. Unused credits automatically apply when filing Form 1116 annually. Credits are applied FIFO (oldest first). Track by year of origin on Schedule B. Credits unused after 10 years expire permanently.
NOTE! Schedule B (Form 1116) reports: prior year carryover by origin year, current year credits, credits used, and remaining carryforward balance. File Form 1116 annually, even if not using all credits, to preserve the carryover chain. Missing a year can cause loss of tracking.
Form 1116 and Schedule B
Form 1116 calculates the foreign tax credit and tracks carryover.
- Part II: FTC limitation.
- Part III: creditable foreign taxes.
Schedule B: carryover reconciliation showing prior year amounts, current year usage, and carryforward to next year.
File a separate Form 1116 for each income category (general/passive).
Required if: claiming FTC, have carryover to track, or foreign taxes exceed $300 single ($600 married). Complete Schedule B annually to maintain the carryover trail even if not using credits currently.
IRS foreign tax credit carryover reconciliation
Schedule B (Form 1116) reconciles carryover by tracking credits by year of origin, calculating current year usage, and determining carryforward amounts. It is required annually to verify a proper credit application.
The foreign tax credit carryover reconciliation schedule outlines how you can report your carryover from year to year. To track the carryover, you’ll need to complete Form 1116 each year. When you file Form 1116, you’ll report the foreign tax credits you’re carrying forward, and the IRS will apply them to future years.
It’s also essential to note that the IRS may require documentation proving that the foreign taxes paid were valid for credit purposes, so retaining proof of payments is key.
NOTE! Keep documentation 10 years: Form 1116 and Schedule B from all prior years, foreign tax receipts, calculation worksheets, and proof of foreign taxes paid.
How to apply foreign tax carryover?
Apply carryover by completing Form 1116 with Schedule B showing prior year amounts. Credits automatically apply up to the FTC limitation. Excess carries forward (carryforward / carry forward) to the next year. No special election is needed.
To apply the foreign tax credit carryover, simply file Form 1116 each year and report any unused credits from previous years. This ensures your carryover tax credits are used to reduce your current US tax liability.
Conclusion
The foreign tax credit carryover is a powerful tool to help expats and US taxpayers reduce their tax liabilities. By carefully tracking your credits and using them in future years, you can effectively minimize double taxation. Always remember to file Form 1116 annually to ensure you’re making the most of your carryover and avoiding missed opportunities for savings.
Foreign tax credit carryover requires careful tracking and strategic planning. Taxes for Expats specializes in FTC optimization, Form 1116 preparation, and carryover calculations.
FAQ – Frequently asked questions
The foreign tax credit carryover period is 10 years carryforward and 1 year carryback. Credits unused after 10 years expire permanently, so track them on Schedule B each year.
Yes – you can carry back foreign tax credits 1 year by filing Form 1040-X for the prior return with a revised Form 1116. It’s optional and may generate a refund.
Yes. To keep carryovers usable, file Form 1116 every year you have credits to track, and file a separate form for general and passive categories.
General vs passive FTC: the general category is wages and active business income. Passive category is dividends, interest, rent, and royalties. You compute limits separately and file separate Form 1116s; credits can’t cross.
Yes. Unused carryforwards expire after 10 years. Use the oldest credits first and track each origin year on Schedule B to avoid losing them.
No. It’s nonrefundable and can only reduce your US tax to zero. A one-year carryback may create a refund by lowering last year’s tax.
No. FTC for US source income isn’t allowed – carryover can only offset US tax on foreign-source income, limited by the FTC limitation.
To calculate the FTC limitation, use: (foreign-source taxable income ÷ worldwide taxable income) × your US tax. Do this separately for each Form 1116 category, then compare to foreign taxes paid.
