What are the separate foreign tax credit baskets and why do they matter?

The Foreign Tax Credit is not one big pool; the IRS separates foreign income and the taxes on it into categories called baskets, and you compute the credit limitation separately for each on Form 1116. The main baskets are passive income, such as dividends and interest, and general income, such as wages and business profits, plus a couple of specialized ones like foreign-branch and GILTI income. Credits and carryovers stay within their basket, so high foreign taxes on wages cannot offset U.S. tax on passive dividends. This prevents taxpayers from blending lightly taxed passive income with heavily taxed active income. For most immigrants the passive and general baskets are what matter. Misclassifying income across baskets is a common error that can waste credits, so map each income stream carefully.