The foreign tax credit reduces U.S. tax dollar for dollar by income taxes paid to a foreign country on the same income, claimed on Form 1116 and limited to the U.S. tax attributable to foreign-source income.
Unused credits carry back one year and forward ten. It is the main alternative to the foreign earned income exclusion for taxpayers in high-tax countries and the only relief for investment income.
Why it matters: choosing between the credit and the exclusion, year by year, is a planning decision with lasting consequences because the exclusion, once revoked, cannot be re-elected for five years. See Form 1116.
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