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Greenback Expat Tax Services - How the Foreign Tax Credit Helps US Expats Avoid Double Taxation (With Example!)

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Author: Greenback Expat Tax Services
Categories: Personal Finance
Tags: finance
Views: 2 · Last viewed: 2026-10-15 07:50 UTC

Short Summary

Main recommendation: Claim the foreign tax credit (FTC) on Form 1116 with your U.S. Form 1040 to offset U.S. tax dollar for dollar by the foreign income tax you already paid, so you avoid being taxed twice on the same income. The example uses $100,000 of taxable income living in the United Kingdom, where the UK rate is 40% versus a 30% U.S. rate. Under this approach, you pay the higher foreign tax and the U.S. tax is effectively covered by it.

Key Points

  • The foreign tax credit reduces U.S. tax owed dollar for dollar, based on foreign income tax paid.
  • It applies only to income taxes; property tax, value added tax (VAT), and similar taxes do not qualify.
  • In the example, the UK tax of $40,000 is paid first, and the U.S. return is then prepared to claim the credit.
  • The speaker describes the outcome as paying the higher of the two countries' tax rates, with the question being how the total is divided between them.

Details Worth Noting

  • Concrete instructions:
    • Pay the foreign income tax to the foreign country first. In the example, file the UK self-assessment (the UK tax return) and pay $40,000.
    • Prepare your U.S. tax return on Form 1040.
    • Calculate the foreign tax credit on Form 1116 and attach it to your U.S. return.
    • Confirm the tax you claim is an income tax, since property tax and VAT are excluded.
  • Example figures: taxable income $100,000; U.S. rate 30%; UK rate 40%; UK tax $40,000.
  • The stated goal is to avoid paying $70,000 total ($40,000 UK plus $30,000 U.S.) on the same $100,000.
  • The transcript does not explain how the U.S. tax is reduced to zero or how the credit limit is calculated, so the exact U.S. tax result in this example is not shown.

Bottom Line

For U.S. expats paying income tax abroad, the foreign tax credit on Form 1116 is the mechanism meant to prevent paying full tax to both countries on the same income.

Main recommendation: Claim the foreign tax credit (FTC) on Form 1116 with Form 1040.

Concrete instructions: Pay foreign income tax first, prepare Form 1040, then calculate the credit on Form 1116, counting only income taxes.