The foreign tax credit for US expats explained: Form 1116 baskets, the 10-year carryover of excess credits, the high-tax kickout, and why it beats the FEIE.
Reviewed by a CPA / Enrolled Agent. Last updated: 19 August 2026.
The foreign tax credit for US expats offsets your US tax bill, dollar-for-dollar, with income tax you have already paid to another country such as the UK. Claimed on Form 1116, it is how most Americans in higher-tax Britain avoid double taxation — and any credits you cannot use in one year can carry forward for years.
This guide covers how the credit works for an American in the UK with salary and investment income: the two "baskets" on Form 1116, why it often beats the Foreign Earned Income Exclusion, the ten-year carryover, and the high-tax kickout. It is general information, not advice — every cross-border return we prepare is reviewed by a licensed professional before filing.
As a US citizen or green-card holder you are taxed on your worldwide income wherever you live. Earn a salary in the UK and both HMRC and the IRS have a claim on the same money — without relief you could be taxed twice. The foreign tax credit prevents that: it lets you claim a credit against your US tax for income tax already paid to the UK on that income.
A credit is far more valuable than a deduction: a deduction reduces the income that is taxed, a credit reduces the tax itself. For an American in Britain — where income tax is often at or above the equivalent US rate — the credit frequently wipes out the US tax on your UK earnings entirely, even though you still file a US return. The IRS sets out the basics on its foreign tax credit page.
The credit is not calculated on your income as a whole. Form 1116 requires you to split foreign income into separate categories — called "baskets" — and work out the credit limit for each independently. You cannot use excess credit from one basket to shelter income in another. The two that matter most for a typical expat are:
Baskets exist to stop taxpayers blending heavily taxed income with lightly taxed income to manufacture credits. In practice, an American in the UK with a well-paid job (highly taxed, general basket) and a portfolio of dividends (often taxed more lightly, passive basket) runs the calculation twice, filing a separate Form 1116 for each basket. The official form and instructions are on the IRS About Form 1116 page.
Americans abroad have two main ways to avoid double tax on earned income: the foreign tax credit, or the Foreign Earned Income Exclusion (FEIE), which removes a capped amount of foreign salary from US tax. For expats in a higher-tax country like the UK, the credit is often stronger:
The FEIE still has its place — for expats in low-tax or no-tax jurisdictions — but switching has consequences: revoking it can lock you out for five years. It is a decision to model, not to default. The IRS compares the options on its Foreign Earned Income Exclusion page.
Here is where higher-tax countries create a hidden asset. If the foreign tax you paid in a basket exceeds the US tax on that basket's income, you cannot claim the whole amount this year — the credit is limited to the US tax on that income. But the excess is not lost. Under the carryover rules you can generally carry unused foreign tax credits back one year and forward up to ten years, within the same basket.
For a US expat in the UK this matters enormously. Because UK income tax often exceeds the US tax on the same earnings, many Americans build up a bank of unused general-basket credits year after year, which can shelter a future year when the balance tips the other way — a large US-source bonus, a Roth conversion, or a spell back in the States. Tracking these carryovers, basket by basket, is one of the most neglected parts of an expat return: lose the schedule and you lose the credit.
The high-tax kickout is a technical rule that catches out DIY filers. Normally passive income — dividends, interest, gains — sits in the passive basket. But if an item of passive income has been taxed abroad above the highest US rate that could apply to it, the rules "kick" it out of the passive basket and into the general basket.
Why does it matter? Because moving income between baskets changes your credit limits in both. For an American in the UK with meaningful investment income taxed at higher UK rates, the kickout is not an edge case — it can decide how much credit you actually get, and it is where professional review pays for itself.
At a high level: you determine the foreign income and foreign tax in each basket, complete a Form 1116 for each, apply the limitation that caps the credit at the US tax on that income, and carry any excess back or forward. A small, all-passive credit reported on a 1099 can sometimes be claimed without Form 1116, but most expats with a UK salary and investments will file it.
Two practical points. Timing: you generally credit foreign tax when it accrues, which does not always line up with the UK tax year. And records: HMRC statements, payslips and dividend vouchers are your evidence, basket by basket. For the full mechanics, IRS Publication 514 is the authoritative source — and because these rules interact, confirm your position with a professional rather than approximate.
The foreign tax credit for US expats is generous, but not simple. The baskets, carryover schedules and high-tax kickout must each be handled correctly, and small errors compound across years of carryforwards. Done well, the credit usually eliminates US tax on your UK income and leaves you with an asset — banked credits — for the future.
If you have fallen behind, our guides on missed US tax returns and the IRS Streamlined Foreign Offshore Procedures explain how many Americans catch up without the harshest penalties. If you would rather a specialist handled the Form 1116 work, our US–UK expat tax accountants do this every day — every return is reviewed by a licensed CPA or Enrolled Agent before filing. Book a consultation to talk through your position.