Creditable Foreign Tax

« Back to Glossary Index

A creditable foreign tax is a foreign tax that qualifies for the U.S. Foreign Tax Credit. To qualify, the tax must be an income tax or a tax in place of an income tax, must be imposed by a foreign country or U.S. possession, and must be a legal and actual foreign tax liability.

Why it matters for U.S. expats

Not every tax paid abroad can reduce a U.S. tax bill. The IRS only allows the Foreign Tax Credit for qualifying foreign taxes, so expats need to distinguish income taxes from VAT, property tax, penalties, social security contributions, and other non-creditable charges before filing Form 1116.

Common questions

1. What foreign taxes are creditable for U.S. expats?

Foreign income taxes and taxes in place of income taxes are creditable when they meet IRS requirements. The tax must be compulsory, based on income, and legally owed to a foreign country or U.S. possession.

2. What foreign taxes are not creditable for U.S. expats?

VAT, sales tax, property tax, wealth tax, penalties, interest, fines, customs duties, and many foreign social security taxes are not creditable as Foreign Tax Credits.

3. Can U.S. expats claim the Foreign Tax Credit for foreign income tax?

Yes. Foreign income tax paid or accrued on foreign-source income can qualify for the Foreign Tax Credit if the tax meets the IRS rules.

4. Can foreign social security taxes be claimed as a Foreign Tax Credit?

No, unless the payment qualifies as an income tax under U.S. rules. Social security contributions are usually handled through totalization agreements, not the Foreign Tax Credit.

5. Can U.S. expats claim a credit for VAT or sales tax paid abroad?

No. VAT and sales tax are consumption taxes, not income taxes, so they do not qualify for the Foreign Tax Credit.

6. Can U.S. expats claim the Foreign Tax Credit for taxes on excluded income?

No. Foreign taxes connected to income excluded under the Foreign Earned Income Exclusion cannot also be used for the Foreign Tax Credit.

7. Can U.S. expats claim the Foreign Tax Credit for tax paid on foreign investment income?

Yes, if the foreign tax is an income tax or tax in place of income tax and the income is foreign-source income. The credit is usually reported in the passive income category.

8. What happens if foreign tax is refunded after claiming the Foreign Tax Credit?

A foreign tax refund can create a foreign tax redetermination. The taxpayer may need to amend the U.S. return and adjust the Foreign Tax Credit previously claimed.

Related forms

• Form 1116: Claiming the Foreign Tax Credit
• Form 1040: U.S. Individual Income Tax Return
• Form 1040-X: Amended U.S. Individual Income Tax Return
• Form 2555: Foreign Earned Income Exclusion

When to get help

Professional guidance is important when:

• You paid tax in another country and want to claim the Foreign Tax Credit.
• You are unsure whether a foreign tax is an income tax.
• You paid foreign social security contributions, wealth tax, VAT, or local taxes.
• You claimed the Foreign Earned Income Exclusion and also paid foreign tax.
• You received a foreign tax refund or adjustment after filing.
• You have foreign investment, rental, pension, or business income.
• You need to separate taxes across general and passive income categories.

Bright!Tax can identify which foreign taxes are creditable, calculate the correct Foreign Tax Credit, and prepare Form 1116. Get started with Bright!Tax.

Related Bright!Tax guides

• What is the Foreign Tax Credit? Your guide to avoiding double tax
• Form 1116 explained: How U.S. expats can claim the Foreign Tax Credit
• Foreign Tax Credit vs. Foreign Earned Income Exclusion
• How the Foreign Tax Credit limitation works

Official sources

• IRS: Foreign Tax Credit
• IRS: Topic no. 856, Foreign Tax Credit
• IRS: Publication 514, Foreign Tax Credit for Individuals
• IRS: Instructions for Form 1116

Reviewed by

Katelynn Minott, CPA & CEO

Last reviewed

June 2026