What if I paid more foreign tax than the formula allows?

The excess carries forward for up to 10 years and can be used in future years when your limitation allows a larger credit. It can also be carried back 1 year.

Why are there separate limitation categories?

Separate categories prevent cross-crediting — using high foreign taxes on passive income to offset U.S. tax on general income. Each category is calculated independently.

Tax Credits (FTC, GBC)

FTC Allowed Formula: How to Calculate Your Foreign Tax Credit

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Key Takeaways

FTC formula: U.S. Tax × (Foreign Income ÷ Worldwide Income) = maximum credit allowed
The credit cannot exceed the U.S. tax attributable to foreign-source income
Excess credits carry forward 10 years and back 1 year
Separate calculations required for general and passive income categories
The formula has remained stable for decades — learn it once, use it forever

The FTC Limitation Formula

The IRS limits the Foreign Tax Credit to prevent you from using foreign taxes to offset U.S. tax on U.S.-source income. The formula is: FTC Allowed = U.S. Tax × (Foreign Taxable Income ÷ Worldwide Taxable Income). This ensures the credit only offsets U.S. tax attributable to your foreign income.

Practical Example

Suppose your worldwide taxable income is $100,000, of which $20,000 is foreign-source. Your U.S. tax is $15,000. The FTC allowed would be: $15,000 × ($20,000 ÷ $100,000) = $3,000. Even if you paid $5,000 in foreign taxes, you can only claim $3,000 as a credit this year.

The excess $2,000 is not lost — it carries forward for up to 10 years (or back 1 year) and can be used when your limitation allows.

Separate Limitation Categories

The FTC must be calculated separately for different categories of income — primarily general category and passive category. This prevents high-taxed foreign passive income from absorbing credits that would otherwise offset tax on general income, and vice versa.

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