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LearnFAQImmigrant & NRI Finance

What happens to unused foreign tax credits I can't use this year?

Answer

Excess Foreign Tax Credits are not lost. Under IRS rules you can carry an unused foreign tax credit back one year and forward up to ten years, applying it against U.S. tax on foreign-source income in those years within the same income category, or basket. This is a major advantage over the Foreign Earned Income Exclusion, which offers no carryover. If you live in a high-tax country and pay more foreign tax than your U.S. liability on that income, you bank the excess for future years when your foreign tax rate might drop or your U.S. liability rises. You track these carryovers on Form 1116. Keep meticulous records year over year, because the IRS expects you to substantiate the origin and category of any carryforward you eventually use.

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