Form 1116: making UK tax count against your US bill.
For most UK-resident Americans the foreign tax credit, not the exclusion, is what reduces the US liability to nothing. Form 1116 is where it is computed — and where the limitation quietly decides how much of it you actually get.
Baskets first, limitation second
Credits are computed separately for each category of income — general, passive, and a special basket for treaty re-sourced income — so UK tax on salary cannot offset US tax on dividends. Within each basket, the credit is capped at the US tax attributable to that foreign income.
Tax above the cap is not lost. Excess credits carry back one year and forward ten, which is how UK-resident Americans build a buffer that can wipe out US tax on a later bonus, disposal or move.
- Separate computation per income basket
- Carryback one year, carryforward ten
- Accrual or cash basis election changes which year credits land in
Credit or exclusion, not casually
The exclusion removes earned income from the calculation; the credit offsets the tax on it. Credits cover every income type, preserve eligibility for IRA contributions and refundable child tax credits, and generate carryforwards — advantages the exclusion does not have.
Because UK rates typically exceed US ones, credits alone usually clear the bill. We model both routes on your actual figures before electing, since revoking the exclusion later locks you out of it for five years.
Questions we get about this
Yes, but not on the same pound of income. Where the exclusion covers part of your salary, only the tax on the remainder is creditable.
The interaction is fiddly and it is where a lot of software goes wrong, usually in the taxpayer's disfavour.
The excess becomes a carryforward - available for ten years against future US tax on income in the same basket.
Those carryforwards are a real asset. They are frequently what makes a later windfall or a return to the US far cheaper than expected.
It does, and it is the main reason the two returns should be prepared together. UK tax on a period can fall due after the US return covering it is filed.
Electing the accrual basis, or timing UK payments, moves credits into the year they are most useful.
Generally no - it is a social security contribution, dealt with under the totalization agreement rather than the tax treaty.
Only income taxes are creditable on Form 1116.
Related pages
- Service
Foreign earned income exclusion
Foreign Earned Income Exclusion explained: Form 2555, the physical presence and bona fide residence tests, the housing exclusion, and when credits beat it.
- Free tool
Foreign tax credit estimator
Estimate your Form 1116 foreign tax credit: how the baskets work, what the limitation allows, and how UK tax paid offsets the US bill on the same income.
- Pillar guide
Tax specialists for US and UK
What US and UK tax specialists handle that a general accountant does not: residence tests, treaty relief, FBAR, PFICs, pensions, property and catch-up filings.
- Glossary
FEIE: definition
The Foreign Earned Income Exclusion — Form 2555 and the choice against foreign tax credits.
- Pillar guide
Accountants for US and UK
How to choose accountants for US and UK tax: what each credential permits, how to verify it, what drives the fee, and when you do not need a specialist.
- Free tool
Late filing penalty estimator
See what unfiled US returns and FBARs actually cost: the penalty stack, how it compounds, and how much of it the relief programmes remove for non-wilful gaps.
Further reading
- How to avoid double taxation between the US and UK, mechanism by mechanism
Both countries can tax the same income - yet almost nobody should actually pay twice. Four mechanisms do the work, and the order you apply them matters.
- Form 2555 or Form 1116: choosing your relief from the UK
Both reliefs can zero your US tax on a UK salary. Only one keeps your refundable credits and IRA room - and switching back later is not quick.
Official sources
Last reviewed . Thresholds and rates change annually — check figures against the current tax year before relying on them.
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