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.
Official sources
Last reviewed . Thresholds and rates change annually — check figures against the current tax year before relying on them.
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