US Expat Tax · Foreign Tax Credit
The Foreign Tax Credit for Americans in the UK
The US Foreign Tax Credit (claimed on Form 1116) gives you a dollar-for-dollar credit for income tax you have already paid to the UK, offsetting your US tax on the same income. Because UK tax rates are generally higher than US rates, the credit usually eliminates double taxation — and often leaves Americans in the UK with excess credits to carry forward. You must still file a US return to claim it.
The Foreign Tax Credit is the most powerful tool most Americans in the UK have for avoiding double taxation. It is a dollar-for-dollar credit — not a deduction — for income tax you have already paid to the UK, claimed on IRS Form 1116 and set against the US tax on the same income.
Here is why it matters so much in the UK specifically: UK income tax rates are generally higher than US rates. So the UK tax you have already paid is often more than the US tax due on that income. The credit offsets your US liability with that UK tax — which is why so many Americans in the UK end up owing little or no US tax, even though they must still file a return every year.
When the UK tax exceeds the US tax on the same income, the unused portion becomes an excess credit. These are not necessarily lost — they can generally be carried back one year and carried forward up to ten, within the same income category. Used well, they can shelter future US tax.
Foreign Tax Credit at a glance
- Form
- Form 1116
- Type
- Credit, not deduction
- Offsets
- US tax with UK tax paid
- Carryback
- 1 year
- Carryforward
- Up to 10 years
- Calculated by
- Income category
Who benefits from the Foreign Tax Credit
- Americans in the UK with UK-taxed employment income
- Dual citizens earning above the earned-income exclusion limit
- Those with UK investment, dividend or rental income (which the FEIE cannot exclude)
- Anyone wanting to keep contributing to US retirement accounts
- People building carryforward credits to shelter future US tax
- Higher earners for whom the FEIE alone leaves US tax still owing
Foreign Tax Credit vs the FEIE
This is the most important decision in most American-in-the-UK returns. The Foreign Earned Income Exclusion (FEIE) excludes earned income up to an annually-set limit; the Foreign Tax Credit credits the foreign tax you paid against your US tax. They are not interchangeable, and the wrong choice can cost you — both now and in future years, because revoking a FEIE election carries restrictions on switching back.
| Foreign Tax Credit | FEIE | ||
|---|---|---|---|
| Form | Form 1116 | Form 2555 | |
| How it works | Credits foreign tax paid against US tax | Excludes earned income up to a set limit | |
| Best when | Foreign tax rate is higher (e.g. UK) | Foreign tax is low or nil | |
| Covers investment & rental income | |||
| Can create carryforwards | |||
| Supports US retirement contributions |
- Form
- Form 1116
- How it works
- Credits foreign tax paid against US tax
- Best when
- Foreign tax rate is higher (e.g. UK)
- Covers investment & rental income
- Can create carryforwards
- Supports US retirement contributions
Foreign Tax Credit
- Form
- Form 2555
- How it works
- Excludes earned income up to a set limit
- Best when
- Foreign tax is low or nil
- Covers investment & rental income
- Can create carryforwards
- Supports US retirement contributions
FEIE
- Form
- How it works
- Best when
- Covers investment & rental income
- Can create carryforwards
- Supports US retirement contributions
Want to see the FEIE side in full? Read our Foreign Earned Income Exclusion guide, or estimate your double-tax position in under a minute.
Common mistakes we see
The errors that cost people most are: trying to claim the FEIE and the Foreign Tax Credit on the same income (you cannot — they can only apply to different amounts); putting income in the wrong category on Form 1116, which distorts the credit; ignoring carryforwards and leaving usable credits on the table; and electing the FEIE in an early year without realising the Foreign Tax Credit would have served better — then facing restrictions on switching.
Related forms and reliefs
The Foreign Tax Credit (Form 1116) sits alongside the FEIE (Form 2555) and the US–UK tax treaty. The art is using them in the right combination and order for your income mix — which is exactly what coordinated US–UK advice provides.
How we handle it
The right relief, claimed correctly
Review
We map your income by type and source, and your UK tax paid, to see where the credit applies.
Compare
We model the Foreign Tax Credit against the FEIE — and combinations — to find your best position.
Claim
We prepare Form 1116 correctly by income category, capturing any carrybacks and carryforwards.
Coordinate
We align it with your UK filings and the treaty so the whole picture works together.
Related areas we handle
Frequently asked questions
The Foreign Tax Credit (FTC) is a dollar-for-dollar US tax credit for income tax you have already paid to another country, claimed on IRS Form 1116. For Americans in the UK, it offsets your US tax bill with the UK tax you paid on the same income, which usually removes any double taxation.
Because UK income tax rates are generally higher than US rates, the UK tax you pay is often more than the US tax due on the same income. The Foreign Tax Credit lets you offset the US liability with that UK tax, so many Americans in the UK owe little or no US tax — though they must still file.
If the UK tax you paid exceeds the US tax on that income, the unused portion is an excess credit. These excess credits can generally be carried back one year and carried forward up to ten years, within the same income category, so they are not necessarily lost.
It depends on your situation, and the two are not interchangeable. The FEIE excludes earned income up to an annually-set limit; the FTC credits foreign tax paid against your US tax. For many Americans in higher-tax countries like the UK the FTC works better and preserves credits, but the right choice — and whether to combine them — depends on your income mix and goals. It is worth getting advice before electing, as switching back after revoking the FEIE has restrictions.
No. You cannot use both reliefs on the same dollar of income. You can use the FEIE on earned income up to the limit and the Foreign Tax Credit on income above it, but they cannot overlap on the same amount. Getting this split right is one of the most common areas where returns go wrong.
IRS Form 1116 for individuals. The credit must be calculated separately by category of income (for example, general income versus passive income), which is one reason the form is easy to get wrong without help.
Make sure you are claiming the right relief
Choosing the Foreign Tax Credit over the FEIE — or combining them correctly — can change what you owe. Book a free consultation and we'll model your position.