What is Tax Form 1116?
Tax Form 1116 is an IRS tax form that determines the Foreign Tax Credit for individuals, estates, and trusts. It is not a mandatory tax form. However, if you are an Expatriate, this is a tax form that you might want to take advantage of.
Who Should Use Tax Form 1116?
It is not unusual for Expats to pay taxes to a foreign country(s) during their stay in that country. These taxes are imposed regardless of one’s nationality.
You should use Tax Form 1116 if you are a U.S. Expat and have paid taxes to any foreign country while also paying taxes to the U.S. off of the same income, so you can avoid double taxation.
If you paid $300 in foreign taxes as an individual or if you paid $600 combined and you are filing a joint return, you should file this form.
By filing Form 1116, you may qualify to receive a tax credit on your income taxes. The Foreign Tax Credit (Form 1116) can lower your taxable income (tax liability) on U.S. taxes due.
There are some limitations that you should know about when it comes to the Foreign Tax Credit. For example, you will not be able to take this tax credit against income that is included under the Foreign Earned Income Exclusion. Also, the tax credit will not exceed your US tax liability. In other words, you will not be issued a refund of foreign taxes paid through your United States tax return.
Additional limitations to watch out for include to which country did you pay your taxes. This is important because there are certain countries that are not eligible when it comes to you receiving a Foreign Tax Credit on your U.S. tax return. These non-eligible countries are countries that have been designated as supporting terrorism as deemed by the Secretary of State.
What Will I need for Tax Form 1116?
For Tax Form 1116, the required documents and information you will need include:
1. The type and amount of income to which the foreign taxes were paid.
2. Records for any income or losses associated with said income.
3. The name of the country to which you legally paid the taxes.
Is this an Easy Form to Fill Out?
We would not rate this as an easy form to fill out. According to the IRS, it should take about 4 hours to complete Tax Form 1116. Extra time should also be dedicated to gathering the necessary documentation, receipts, and records as well as completing the rest of Tax Form 1040 (or 1041). If you use accounting software like Quickbooks throughout the year, this could save you some time on tax preparation come tax time. As always, a licensed CPA can help make this whole process much easier.
What’s Covered in Form 1116?
Tax Form 1116 has 4 major parts or sections. They are as follows:
1. Taxable Income or Loss from Sources Outside the United States
2. Taxes Paid or Accrued
3. Figuring the Credit
4. Summary or Credits from Separate Parts III
Download Tax Form 1116
To download Tax Form 1116 from the IRS please visit -> https://www.irs.gov/pub/irs-pdf/f1116.pdf.
For the IRS instructions on Form 1116, please read -> Instructions for Form 1116.
Get Your Questions Answered
If you have any questions about form 1116 or Foreign Tax Credits, please be sure to give us a call so that we can help you.