Form 1116 - Foreign Tax Credit

Form 1116 is a tax form used to claim a foreign tax credit, which allows U.S. taxpayers to reduce their U.S. tax liability by the amount of foreign taxes paid on foreign-sourced income. The form is used to report foreign taxes paid and to calculate the foreign tax credit.

What is Form 1116 used for?

• Claiming a foreign tax credit for foreign taxes paid on foreign-sourced income.
• Reporting foreign taxes paid and calculating the foreign tax credit.
• Reducing U.S. tax liability by the amount of foreign taxes paid.

Key Components of Form 1116

• Foreign Taxes Paid: Reporting the amount of foreign taxes paid on foreign-sourced income.
• Foreign-Sourced Income: Identifying the type and amount of foreign-sourced income, such as dividends, interest, or capital gains.
• Foreign Tax Credit Limitation: Calculating the limitation on the foreign tax credit, which is the amount of U.S. tax liability that can be reduced by the foreign tax credit.
• Carryover and Carryback: Reporting any unused foreign tax credit that can be carried over or carried back to other tax years.

Why is Form 1116 important?

• It allows U.S. taxpayers to reduce their U.S. tax liability by the amount of foreign taxes paid on foreign-sourced income.
• It helps to avoid double taxation on foreign-sourced income.
• It is used by the IRS to verify the accuracy of foreign tax credits claimed on individual and business tax returns.

Who needs to file Form 1116?

• U.S. citizens and residents who have foreign-sourced income and paid foreign taxes on that income.
• Nonresident aliens who have U.S. sourced income and paid foreign taxes on that income.
• Businesses that have foreign-sourced income and paid foreign taxes on that income.