Form 1116: making UK tax pay your US bill.
The foreign tax credit is the engine of most Americans' UK filings: dollar for dollar, UK tax paid offsets US tax on the same income. In a high-tax country it routinely zeroes the US liability — and banks the surplus for later.
Figures relate to tax year 2025 (US) · 2025-26 (UK)
How the credit actually computes
Form 1116 separates income into category baskets — general income like salary, passive income like dividends — and limits the credit in each basket to the US tax attributable to that basket's foreign income. UK tax usually exceeds the US tax on the same salary, creating excess credits.
Excess credits carry back one year and forward ten. That bank matters: it can cover a later low-tax year, a bonus, or the year you move home mid-calendar.
- Passive and general baskets computed separately
- Credit limited to US tax on the foreign income
- Excess credits: one year back, ten forward
- Paid or accrued — matched across mismatched tax years
Credit or exclusion: a decision, not a default
The FTC competes with the foreign earned income exclusion, and in the UK the credit usually wins: it covers all income types, preserves credit carryovers, and keeps refundable child tax credits available. But the arithmetic shifts with income mix and future plans.
We model both routes before filing — because revoking the exclusion later locks you out of it for five years.
Primary sources
Official guidance from the IRS, FinCEN and GOV.UK. Thresholds and rates on those pages are updated annually — check the current tax year before relying on a figure.
Questions, Answered.
What clients ask about foreign tax credit — form 1116
Should I use the FTC or the foreign earned income exclusion?
In a high-tax country like the UK, usually the credit — often it eliminates the US bill and builds carryovers, and it keeps certain refundable credits in play. But it's a modelled decision: the exclusion can win for lower incomes or lower-tax postings.
The UK tax year doesn't match the US one. Which tax do I claim?
Credits are claimed on a paid or accrued basis and mapped to the US calendar year. Consistency of method matters, and the mapping is where careless returns leak credits.
Can the credit offset all US taxes?
It offsets regular income tax on foreign income. It does not offset the net investment income tax — a live irritation for Americans abroad — and it can't touch US tax on US-source income beyond the basket limits.
Can I claim UK National Insurance as a foreign tax credit?
No — NI is a social security contribution, not an income tax, so it doesn't qualify for Form 1116. The totalization agreement handles social security separately; only UK income tax feeds the credit.
Do unused foreign tax credits expire?
Eventually — excess credits carry back one year and forward ten. Most Americans in the UK accumulate them faster than they use them, and the bank pays out in a low-UK-tax year, a sabbatical, or the year of a move home.
Next Step.
Tell us what you hold — the scope and a fixed fee follow in writing.