Form 1116
IRS, Foreign Tax Credit
The form that turns UK income tax into a credit against US tax on the same income, with carryovers for unused amounts.
What is Form 1116?
Form 1116 is the main tool for stopping the same income being taxed twice by the UK and the US. It gives a dollar-for-dollar credit for UK tax, limited to the US tax attributable to the foreign income. For most Americans living in Britain it is the form that does the heaviest lifting on the return.
How UK tax becomes a US credit
The credit is calculated separately for each category of income.
General category covers most wages and business income. Passive category covers most dividends, interest and investment gains. Within each category the credit is capped at the proportion of US tax that the foreign income bears to total income, so excess UK tax on salary cannot be used against US tax on passive income. Each category needs its own Form 1116.
Timing is the difficulty for UK residents. The UK tax year runs from 6 April to 5 April, and UK tax is often settled well after the US return for the same months. Taxes are claimed either when paid or, by election, when they accrue, and the accrual method usually matches the two years more closely. Once chosen, it binds later years. Unused credits carry back one year and forward ten, which lets high UK tax in one year cover US tax in another.
Several adjustments feed into the limit. Qualified dividends and capital gains are adjusted so that the lower US rates on them do not inflate the credit. Income that the treaty treats as UK-source can sometimes be resourced into the foreign basket. The alternative minimum tax has its own version of the credit. Some filers with only small amounts of passive foreign tax can claim the credit without the form, but that election gives up any carryover.
At a glance
- Form 1040, one per income category
- Attached to
- Unused credit carries back one year and forward ten
- Carryover
- Cash or accrual; accrual binds later years
- Timing election
- General and passive
- Common categories
Figures are for the tax year stated in the official instructions linked below.
How we handle it
- Individual Tax Returns
US federal returns for Americans living in the UK and British nationals with US income, prepared with the UK figures in view.
- Treaty Relief
Claims under the US/UK income tax treaty, with Form 8833 disclosure, residence tie-breaker analysis and reduced withholding on US income.
- Cross-Border Tax
US and UK returns prepared together from one set of workpapers, so credits, tax years and exchange rates line up across both.
- Tax Planning
Forward planning across the US and UK tax systems: timing income, choosing investments, arriving, leaving and organising family finances.
Where people go wrong
The Form 1116 errors we correct most often.
Who files it
- US citizens and green card holders paying UK income tax through PAYE
- Americans in Britain receiving UK dividends, interest or pension income taxed by HMRC
- Filers with unused credits carried from earlier years
- Taxpayers moving from the earned income exclusion to the credit method
01
Claiming UK tax against the wrong US year because of the April tax year
02
Mixing salary and investment income in one category instead of splitting them
03
Losing track of carryovers between years or between preparers
04
Claiming credit for UK tax that was later refunded by HMRC
Why US UK Tax Returns
Every form is prepared against the official instructions, and every position on it is one we can point to in the Code, the treaty or HMRC's guidance.
One File
US and UK returns prepared in the same engagement and reconciled line by line.
Primary Sources
Every position traced to the Code, the treaty, IRS instructions or HMRC guidance.
Scope First
Returns, forms, years and fee agreed in writing before work begins.
The Same People
The team that files this year carries the elections and credits into the next.
Questions we are asked
My UK tax is higher than my US tax. What happens to the difference?
The excess becomes a carryover in the relevant income category. It can be carried back one year and forward ten, where it offsets US tax on foreign income in that category if the limit allows. This is useful for people who may later return to the US or have years of lower UK tax. Carryovers need to be tracked carefully, because the IRS does not keep the running total for you.
Should I use the cash or accrual method for UK taxes?
The accrual method usually works better for UK residents because it matches UK tax to the US year in which the income was earned, rather than when HMRC was paid. Once a filer claims on the accrual basis, later years must follow it. Switching the other way needs IRS consent. The choice is worth making deliberately in the first year of claiming.
Can I claim a credit for UK National Insurance contributions?
Generally not. The totalization agreement between the US and the UK assigns social security coverage to one country, and contributions covered by that agreement are not treated as creditable income taxes for US purposes. They also do not reduce US income. UK income tax, by contrast, is creditable, subject to the limit on Form 1116.
Primary sources
What this page says is drawn from the official material below. Read it yourself; we would rather be checked than trusted.
Last reviewed
Also in Relief From Double Tax
From the Blog
Need Form 1116 prepared or reviewed?
Tell us where you live, what you hold and which years are outstanding. We will say what applies and what it involves before any work begins.
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