You can claim the foreign tax credit without Form 1116 only when three conditions hold together: every dollar of foreign-source gross income is passive category income, all of it and the tax on it appear on a qualified payee statement such as a Form 1099-DIV, and the creditable foreign tax stays within a small annual cap, doubled for a joint return. The Instructions for Form 1116 (opens the official IRS page in a new tab) call this an election, and it is made one year at a time.
This post is for US citizens and green card holders in Britain who have been told their software can skip the form, and for people who have moved back to the United States and now see only a line of foreign tax on a brokerage statement. It extends the Form 1116 section of our guide to avoiding US-UK double taxation. It covers the conditions, why a UK resident almost never meets them, what the election costs, a worked example and a decision list.
When can you claim the foreign tax credit without Form 1116
When your foreign income is small, passive and reported to you by a US payer. The election switches off the Form 1116 limit, so the credit becomes the smaller of your total foreign tax and your regular US tax. It is not automatic, and it says nothing new about which taxes are creditable or which year they belong to.
Publication 514 (opens the official IRS page in a new tab) sets out the conditions as a single test, and failing any part of it means the form is needed. The instructions add that estates and trusts cannot use the election at all. Check the figure in the current year's instructions before relying on it, and remember that the cap measures creditable foreign tax, not the income that produced it.
The election only exempts you from the limit worked out on the form. Publication 514 is clear that the other rules still apply: the tax must be a legal and actual liability, it must be an income tax or a tax in lieu of one, and any reduction the instructions require on line 12 still has to be made. Our post on which UK taxes count for the credit covers that question.
- Only passive category income from abroad. Interest and dividends mostly, with high-taxed income and export financing interest counted as passive for this test
- All of it on a payee statement. Form 1099-DIV, 1099-INT, the trust and partnership schedules the instructions list, or a substitute for them
- Creditable foreign tax within the cap. A small annual figure for most filers, doubled for married filing jointly
- An election for the year. Made by entering the credit directly on the return, as described below
Why the election rarely fits someone living in the UK
Because the first condition looks at all of your foreign-source gross income, not just the item with tax on it. A UK salary is general category income, and a single pound of it fails the test. So does UK interest or rent that reaches you without a US payee statement, even if no UK tax was charged on it.
The instructions list wages, salary and overseas allowances of an employee as general category income, and compensation for work done outside the United States is generally foreign-source. Anyone on a UK payroll therefore has general category foreign income and needs Form 1116, whatever the size of the tax. Our post on sorting UK income into general and passive explains where each item falls.
The payee statement condition shuts out most of what is left. A UK bank, building society or platform reports to HMRC and does not issue a Form 1099, and the instructions name only US statements and substitutes for them. A UK-resident retiree with no salary still usually has UK interest, a UK pension or a let flat, none of which arrives on a qualifying statement.
- UK salary or bonus. General category income, so the election is unavailable for the year
- UK bank or ISA interest. Foreign-source and passive, but not reported on a US payee statement
- UK rent. Usually passive, but reported on Schedule E from your own records, not on a Form 1099
- US dividends taxed by the UK. Relieved through the separate re-sourced category, with the UK tax shown on no US statement
What you give up by skipping Form 1116
You give up carryovers for that year in both directions. Publication 514 says that if you make the election, you cannot carry back or carry over any unused foreign tax to or from that tax year. Nothing leaves the year, and an older balance cannot be used in it either.
In the ordinary course unused foreign tax is carried back one year and forward ten, within its own category, and a year with spare room under the limit is where an old balance gets used up. Our post on carrying excess UK tax credits back and forward explains how the pool works. A year under the election is a year in which that pool cannot be touched, so the election is cheapest for someone with no balance at all.
The election does not let you mix methods. The credit or deduction choice still covers every qualified foreign tax for the year, as our post on the credit or the deduction for UK tax sets out. The amounts still need converting into dollars at the right rate, covered in our post on converting UK tax into dollars, although a US payee statement usually reports them in dollars already.
How does this work for an American back from London?
Take a US citizen who spent several years employed in London and has now moved to Chicago to work for a US employer. Her only foreign income this year is her share of foreign dividends from an international index fund held at a US broker, and the fund passes through a small amount of foreign tax on her Form 1099-DIV.
On those facts she meets every condition. Her salary is US-source, the fund dividend is passive, the income and the tax sit on a payee statement, and the tax is well inside the cap. Publication 514 explains that a mutual fund which elects to pass the credit through reports the shareholder's share of foreign income and tax on Form 1099-DIV or a similar statement.
The catch is her history. During her London years some UK tax on investment income went unused in the passive category, and part of that balance is still within its carryover period. Fund dividends can bear foreign tax well below the US tax on them, so a Form 1116 would show room under the passive limit. Filing the form lets that room absorb part of the old balance. Claiming without it forfeits the chance for this year.
A different returnee with no carryover and the same statement would usually take the shortcut and lose nothing, since there is no balance to use and no realistic prospect of building one. The figures differ for each person, so our individual tax returns service runs the return both ways in the first years after a move, and our cross-border tax service handles the final UK return alongside it.
Should you claim without the form: a decision list
Work through the questions in order and stop at the first that settles it. Most people living in the UK stop at the first or second. The election is a simplification for small, clean amounts reported by a US payer, and it is the wrong tool for anyone whose foreign income comes from a UK employer or a UK account.
Answering yes to the last question does not oblige you to make the election. Filing Form 1116 is always permitted, and it may be the better choice where you expect a later year with excess limit in the passive category and want this year's unused tax kept in the pool. The IRS overview of the foreign tax credit (opens the official IRS page in a new tab) describes the general rules the form applies.
- Any UK salary, self-employment profit or UK pension this year? Yes means Form 1116
- Any foreign income not shown on a US payee statement, including UK interest or rent? Yes means Form 1116
- Creditable foreign tax above the cap for your filing status? Yes means Form 1116
- A passive carryover still within its period, with room under the limit this year? Yes usually favours Form 1116
- Expecting a later year with spare passive limit? Yes may favour Form 1116 to keep this year's unused tax
- None of the above? The election is available and usually the simpler route
How is the election made on the return
By entering the credit directly on the foreign tax credit line, Schedule 3 of Form 1040 (opens the official IRS page in a new tab), Part I, line 1. The instructions say to enter the smaller of your total foreign tax or your regular tax. No separate statement is needed, and the choice is made afresh on each year's return.
Keep the payee statements that support the figure with your records, because the election rests on them. If a corrected statement arrives after filing and shows figures that no longer meet the conditions, the return needs revisiting with Form 1116. Our Form 1040 page lists the schedules that usually travel with a cross-border return, and our treaty relief service reviews the credit lines on it.
For anyone still living in Britain, the realistic route is the full form, prepared category by category from the UK return, with the UK tax apportioned between categories and converted for the right US year. Our guide to avoiding US-UK double taxation shows how Form 1116 sits alongside the exclusion and the treaty, and the About Form 1116 (opens the official IRS page in a new tab) page links to the current form and its instructions.
General information, not advice. The right answer depends on your circumstances and the tax year concerned.
