Form 1116: How to Recover Foreign Taxes as a US Expat

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Foreign dividend withholding — the slice Germany, Japan, Switzerland, and France take before your dividends reach your brokerage account — is fully creditable against your US federal tax bill. Filing Form 1116 recovers those withheld amounts dollar-for-dollar, up to your US tax liability on that income. Most expat investors who hold international stocks or ETFs are leaving this credit on the table simply because they've never worked through the form.

Who Needs to File Form 1116?

You file Form 1116 if you paid or accrued income taxes to a foreign country during the tax year and want to claim those taxes as a credit against your US federal income tax. That covers US citizens abroad paying local income tax on their salaries, expat investors receiving dividends from foreign stocks with withholding, and remote workers whose host country treats them as tax residents.

You do not need Form 1116 if your total creditable foreign taxes for the year are $300 or less (single) or $600 or less (married filing jointly), AND all your foreign income is passive income reported on qualified payee statements — a 1099-DIV, 1099-INT, or similar form issued by your broker. In that case, you can enter the credit directly on Schedule 3 of Form 1040. But there is a cost to this shortcut: you forfeit the right to carry unused credits forward. If you have significant foreign investment income or plan to in the future, filing Form 1116 is almost always worth the extra work.

Per the IRS About Form 1116 page, individuals, estates, and trusts may claim the credit. Corporations use Form 1118 instead.

The Income Baskets: One Form Per Category

The most important mechanical rule on Form 1116 is that you file a separate copy for each income category, and you cannot transfer credits across categories. Excess credits from German income taxes on your salary cannot offset the US tax you owe on Swiss dividend withholding, and vice versa.

Basket	What It Includes	Common Source
Passive Category	Dividends, interest, royalties, rents, capital gains not from active business	Foreign stocks withheld at source; foreign bank interest; foreign rental income
General Category	Wages, salaries, business income, consulting fees, self-employment income	Local income taxes in your country of residence on earned income
Foreign Branch	Business profits from a qualified business unit (QBU) operating in a foreign country	Expats running a foreign branch of a US business
Section 951A (GILTI)	Global intangible low-taxed income from controlled foreign corporations	Expats owning foreign corporations with substantial earnings

For most US expats, only Passive and General categories apply. If you live in Germany and pay German income tax on your salary while also receiving dividends from German stocks with withholding at source, you file two copies of Form 1116 — one marked "General" and one marked "Passive."

How the Credit Limitation Formula Works

The foreign tax credit is not unlimited. The IRS caps it at the amount of US tax you would have owed on that specific category of foreign income. The formula, per the Form 1116 instructions:

Credit Limit = US Tax × (Foreign Source Income in Category ÷ Total Worldwide Income)

The credit you claim is the lesser of (1) the foreign taxes actually paid, or (2) this computed limit.

If foreign taxes exceed the limitation — common in high-tax countries like France, Germany, or Japan — the excess does not disappear. It carries back one year and then forward ten years, applied in the order earned. Schedule B of Form 1116 tracks these carryovers automatically.

Recovering Dividend Withholding on Foreign Stocks

When you receive dividends from foreign stocks — held directly or through ADRs — the source country typically withholds a portion before the dividend reaches your account. That withheld amount appears on your brokerage statement and on Box 7 of your 1099-DIV. It goes on the passive category Form 1116 and is generally recoverable against your US tax on that same passive income.

Standard withholding rates vary significantly by country. The rate your broker actually withholds may be the domestic rate or the reduced treaty rate, depending on how your shares are held:

Country	Standard Rate	US Treaty Rate
Germany	26.375% (incl. solidarity surcharge)	15%
Japan	15.315%	10%
France	30%	15%
Switzerland	35%	15%
Canada	25%	15%

If you receive dividends withheld at the standard rate but the treaty rate is lower, you can claim a refund from the foreign tax authority for the excess. In practice, most large brokerages apply the treaty rate automatically for US account holders on treaty-eligible holdings, so the amount on your 1099-DIV is already the reduced rate — which is the amount you claim on Form 1116.

The 90-day holding period requirement: To claim the foreign tax credit on dividends, you must have held the shares for at least 90 days within the 181-day window centered on the ex-dividend date. This is the same holding period rule that determines whether a dividend is "qualified" for the lower US tax rate. Shares held less than 90 days are still taxed as ordinary income, and the related withholding is not creditable. For expats investing in individual foreign stocks, this holding period is a meaningful constraint — not an issue for long-term index fund investors but relevant for anyone trading in and out of dividend-paying foreign equities.

The expat dividend withholding guide covers which account types and brokerage structures best preserve your ability to reclaim these taxes as a US investor abroad.

Using FEIE and Form 1116 in the Same Year

You cannot claim the foreign tax credit on income you've already excluded from US tax under the Foreign Earned Income Exclusion. If you exclude $132,900 in wages for 2026 using Form 2555 (FEIE), those wages cost you no US tax — so there is no US tax liability against which to offset the corresponding foreign income taxes. Claiming both on the same income is not permitted.

The practical setup many expats use: FEIE for earned income up to the exclusion ceiling, Form 1116 for passive investment income on a separate copy. If your salary exceeds the FEIE limit, you can also claim Form 1116 on the excess earned income above the exclusion. This requires careful allocation — you must identify which foreign taxes correspond to the excluded portion versus the taxable portion.

The FEIE vs. foreign tax credit comparison works through when each approach produces a better outcome and whether switching is allowed. For expats with significant investment income alongside earned income, Form 1116 for passive income often provides more long-term value than relying solely on FEIE.

Which Foreign Taxes Actually Qualify

Not all foreign taxes are creditable. Only income taxes — or taxes levied "in lieu of" an income tax — qualify for Form 1116. The legal authority is IRC Section 901, which limits the credit to income, war profits, and excess profits taxes paid to a foreign government. The IRS takes this distinction seriously.

Taxes that qualify:

• National and provincial income taxes paid to a foreign government on your earned income or investment returns
• Foreign dividend withholding taxes deducted at source (if the underlying shares are held the required period)
• Foreign capital gains taxes on investment sales
• Certain taxes imposed in lieu of income tax (e.g., some resource extraction levies in specific countries)

Taxes that do not qualify:

• Value-added tax (VAT)
• Sales tax or goods and services tax (GST)
• Property taxes
• Inheritance and estate taxes
• Wealth taxes (with narrow exceptions in specific treaty contexts)
• Taxes to countries designated as sponsors of terrorism under US law (currently Cuba, Iran, North Korea, Syria)

The IRS publishes the full list of requirements a foreign levy must meet to qualify as a creditable tax in Publication 514: Foreign Tax Credit for Individuals. If you are unsure whether a specific levy qualifies — particularly common with French social charges (CSG/CRDS) or Italian regional taxes — this publication and a tax advisor consultation are the authoritative reference.

The tax must also be legally owed and actually paid or accrued. Taxes paid on refundable credits, disputed amounts with no final determination, or amounts that are ultimately refunded cannot be credited in the year claimed and may require an adjustment.

Carryforward and Carryback Rules

If your creditable foreign taxes exceed the credit limitation in a given year — meaning the foreign country taxed you at a higher rate than the US would have — you don't lose the excess. The unused credit carries back one year (generating a refund or credit for that prior year) and then forward up to ten years, where it offsets future US tax on future foreign-source income.

Schedule B of Form 1116 tracks these carryovers by year and category. The IRS uses a first-in-first-out rule: oldest carryover credits are applied before newer ones. This matters for expats who move between high-tax and low-tax countries over a career — unused credits from high-tax years can shelter tax in lower-tax years, but only up to ten years out.

Two situations where the carryforward is especially valuable:

• Large capital gain in a low-tax country: You realize a $200,000 gain from selling a rental property in Spain, which charges no capital gains tax to the buyer under certain conditions. The US taxes the gain at capital gains rates with no FTC offset. But if you have accumulated passive-category FTC carryovers from prior years of dividend withholding, those offset the US capital gains tax here.
• Retirement transition: Expats moving from a high-tax working country (France, Germany, Scandinavia) to a lower-tax retirement country often carry forward significant general-category FTC that then becomes harder to use — since earned income drops. Plan the transition with a tax advisor to make sure carryovers are applied before they expire.

Eight Common Form 1116 Mistakes

1. Combining income categories on one form. Each basket requires its own Form 1116 filed separately. Credits do not cross baskets.
2. Using the bank exchange rate instead of the IRS Yearly Average Exchange Rate. The IRS requires foreign taxes to be converted using official Treasury rates, which are published annually and differ from spot or bank rates.
3. Claiming the credit on FEIE-excluded income. The credit is limited to income that is actually included in your US tax base. FEIE-excluded income has no corresponding US tax — so there is no liability to offset.
4. Skipping the simplified method analysis. If your foreign taxes are under $300/$600 and purely passive, skipping Form 1116 is faster — but you surrender the carryforward. Run the numbers before deciding.
5. Ignoring the high-tax kickout rule. If foreign taxes on passive income exceed a certain threshold (roughly equivalent to 10% of the income), that income is reclassified from the passive basket to the general basket. This automatic reclassification can reduce your passive FTC and move the credit to a basket you may not have other credits to offset against.
6. Missing the 90-day holding period on dividends. Dividend withholding on shares held fewer than 90 days is not creditable and cannot appear on Form 1116.
7. Not completing Part IV Lines 25-32. As of the 2025 Form 1116 instructions, these lines must be completed even when filing only one copy of the form. Many tax software programs handle this automatically, but a manual filer can overlook the requirement.
8. Letting carryovers expire. FTC carryovers expire after ten years. Expats who move to a zero- or low-tax country sometimes stop paying close attention to accumulated carryovers from prior years. A carryover that expires unused is a permanent loss.

For expats who hold international securities through Charles Schwab's international brokerage, the account generates a consolidated 1099 that includes a foreign tax paid summary, making the Form 1116 input straightforward. For accounts at foreign brokers, you will need to gather withholding statements from the foreign institution, convert at the correct IRS exchange rate, and enter them manually.

Expats building a multi-currency investment portfolio also need to understand how foreign funds held through non-US accounts interact with PFIC rules — a separate and expensive layer of complexity covered in the expat PFIC guide.

What This Means for Your Filing

Form 1116 is one of the few places in the US tax code where expats genuinely get something back — a dollar-for-dollar offset for taxes already paid to another government. The calculation is mechanical once you understand the income categories, the limitation formula, and the holding period rules. The most expensive mistake is not claiming it at all.

For expats in high-tax countries like Germany, France, or the Netherlands, the foreign tax credit on general category income typically eliminates the US tax bill entirely on that income. For expats with international stock holdings, the passive category credit recovers dividend withholding year after year. Both are worth the extra forms.

Data note: Form 1116 income baskets, de minimis thresholds ($300/$600), carryforward rules (10 years/1 year carryback), and 2025 Part IV requirements were verified against the IRS Form 1116 instructions in June 2026. Exchange rate requirements and treaty withholding rates may vary — confirm current rates at the time of filing.

Sources checked

• IRS: About Form 1116, Foreign Tax Credit
• IRS: Instructions for Form 1116 (2025)
• IRS: Form 1116 (2025) — PDF