1116 Form Instructions

Form 1116 is another important US tax form for American expats as well as other US taxpayers with foreign income. Earlier we discussed form 2555. Americans living abroad can claim the foreign earned income exclusion and foreign housing exclusion if they meet either the physical presence test or bona fide residence test. Additionally, US expats can file 1116 form to claim the foreign tax credit for foreign income taxes paid when they file US expatriate tax returns. Also Americans can take the foreign tax credit deduction. The purpose of this article is to provide American expats with basic IRS form 1116 instructions.

This is one of the emails from our clients, US taxpayers and American expats living abroad. “I am planning to move from Cleveland, Ohio to Ireland on September 1. I read your article about IRS form 2555 that can be filed with US expatriate tax returns. However, I realize that I can decrease my US taxes for foreign income taxes paid by filing 1116 form. I would like to understand IRS form 1116 instructions.”

Overview of 1116 Form instructions

Who can file form 1116?

US taxpayers, estates and trusts can claim foreign tax credit for income taxes paid to a foreign country. The IRS is specific about the eligible foreign taxes. Specifically, the list includes foreign income taxes, taxes on interest, excess profits taxes, or taxes on war profits to an eligible foreign country or US territory. The list of ineligible countries is indicated in the publication 514. Also, American expats cannot claim a credit for foreign taxes that can be refunded by a foreign country. The form must be attached to form 1040.

Should US expats file this form?

American expats are not required to file 1116 form. Specifically, if the amount of foreign taxes is less than $300 per person ($600 in case of a joint return), then American taxpayers can claim the foreign credit without filing 1116 form.

Which information should US expats gather to prepare this form?

American expats must collect the information about the amount and type of foreign income associated with the foreign taxes, the name of country, deductions and losses associated with this foreign income as well as the credit computation. The worksheets to calculate the foreign credit require a lot of patience and time. Moreover, American taxpayers must calculate a separate worksheet if they are subject to alternative minimum tax (AMT)

When is the due date of 1116 form?

Per IRS instructions, this form must be filed by the due date (including extensions) of US expatriate tax returns. The form must be sent with form 1040 to the same tax filing address.

What is the biggest misconception about this form?

Many American expats think that they are not required to file US tax return, form 1116 or form 2555 if their entire foreign earned income is under the foreign earned income exclusion. However, 1116 form should be filed to take advantage of foreign tax credit. If the IRS files this form for Americans living abroad, then the IRS does not take into consideration any exclusion or deduction.

How much time does it take to prepare 1116 form?

Per IRS instructions, US expats will spend an average of 4 hours to prepare the form.

Are there any penalties for a failure to file 1116 form?

American expats will not pay any fees or penalties if they did not file the form. The only disadvantage is that they will not minimize US tax liability.

Conclusion

US expats must carefully the IRS form 1116 instructions to file this form correctly as this form is quite confusing. Americans living abroad should be aware that they can be required to file many other US expatriate tax forms like FBAR, FATCA etc. US expatriates should contact an expat CPA that specializes in US taxes for expats. International tax experts at Artio Partners will be happy to help you.