Individuals, estates, and trusts can take the foreign tax credit using Form 1116. If any of these entities paid foreign taxes to a foreign country or US possession, the foreign tax credit can be claimed. In order for the taxpayers to take the foreign tax credit on their federal income tax returns whether it be Form 1040 or 1120, Form 1116 must be filed and attached.
Form 1116 is a simple tax form to file but it takes some preparation and information gathering. It’s made up of four separate parts.
Individuals, trusts, and estates need to report the following on Form 1116.
- Taxable income or loss from sources outside the United States
- The income and loss need to be reported here. This includes gross income from all the sources, deductions, and losses.
- Foreign taxes paid or accrued
- The credit claimed for taxes must be reported along with the date paid or accrued, dividends, rents and royalties, and interest in both US dollars and foreign currency.
- Calculating the credit
- The third part of Form 1116 is where you will calculate the credit. You will use the information entered on the previous lines and do some math to figure out how much you’re eligible to claim with the foreign tax credit.
- Summary of credits from separate Parts 3
- Report credit for taxes on section 951A, foreign branch category income, passive category income, general category income, section 901(j) income, certain income re-sourced by treaty, lump-sum distributions, and the total of these. this will enable you to boost the foreign tax credit.
All and all, Form 1116 can be quite easy to file but as stated above, it takes a lot of time to prepare and gather the information necessary for Form 1116. Once Form 1116 is filed, it must be attached to the federal income tax return of the entity. Form 1116 can be filed electronically or on paper. Get 2024 Form 1116 and file it online to attach to tax return.