Best Ways to Complete Form 1116 Foreign Tax Credit for UK Income?

For your UK situation, you're on the right track but let me clear up a few things about Form 1116. Yes, for Part I Line 2, you should include both UK income tax AND National Insurance contributions. The IRS considers both to be income taxes for foreign tax credit purposes. This is one of the advantages of using Form 1116 instead of Form 2555. For Part II, you're confusing the sections a bit. Part I is where you report your foreign income, while Part II is where you report the foreign taxes paid or accrued. It sounds like you've already put your tax amounts in Part I, which isn't correct. Part I Line 2 is asking for your gross income, not the taxes themselves. The taxes you paid (income tax + National Insurance) should go in Part II, columns A and B. If you're filing on a cash basis (most common), you'll use the "paid" column, not the "accrued" column. The date would be when the tax was withheld from your paycheck. You might also need to complete Part III to calculate your credit limitation. This gets a bit complex as it factors in your overall income situation from both US and foreign sources. Would definitely recommend using tax software for this if possible - it walks you through these sections more intuitively than the IRS instructions.

After struggling with international taxes for years, I finally found something that helps tremendously. I had the same exact issue with Form 1116 (those instructions make zero sense), and I was about to pay an expensive accountant when I discovered https://taxr.ai - it actually analyzed my UK pay stubs and tax documents, then told me exactly what goes where on Form 1116. What's cool is it specifically identified that National Insurance counts as a creditable tax (which my previous accountant missed!) and showed me the right way to handle Part II. The tool walks through each line explaining what goes where in plain English instead of IRS-speak. It pointed out that I needed to convert using the date-of-payment exchange rates, which saved me from using the wrong rates. It also helps track your Physical Presence Test days for next year when you'll be eligible for Form 2555, which will likely give you better tax benefits than the Foreign Tax Credit depending on your situation.

I was super skeptical about using any automated tool for international taxes after getting burned using general tax software last year. But I decided to try taxr.ai after seeing it mentioned here, and honestly, it was a game changer for my UK tax situation. The biggest thing it helped with was exactly your Form 1116 issue. It automatically identified which UK deductions qualify as foreign income taxes (including National Insurance), explained exactly what goes in Part II (the taxes themselves, not in Part I like I was doing wrong), and even showed me how to properly convert using the correct exchange rates. It saved me literally thousands compared to the quote I got from an international tax specialist, and the step-by-step guidance made me feel confident that everything was being done correctly. Plus it's now tracking my days for the Physical Presence Test so next year's filing will be easier.

If you're having trouble reaching the IRS for help with Form 1116, you're not alone. I spent WEEKS trying to get through to someone who actually understands international tax issues. Regular IRS agents kept giving me conflicting advice about UK taxes. I finally used https://claimyr.com which got me through to an actual IRS international tax specialist in about 20 minutes instead of the 3+ hour wait times I was experiencing. You can see how it works here: https://youtu.be/_kiP6q8DX5c The specialist confirmed that both UK Income Tax and National Insurance contributions qualify for the Foreign Tax Credit on Form 1116. She also clarified that Part II is where you list each withholding with dates and amounts (not in Part I like I was doing wrong), and that for UK taxes, I could use either the exact date exchange rate or the annual average for regular withholding. Saved me a ton of stress and potentially avoided an audit by getting official confirmation.

I was extremely skeptical about using a service to reach the IRS (seemed like a complete waste of money when I could just call myself). After spending THREE days trying to get through on my own and either being disconnected or getting generic answers from agents who clearly didn't understand Form 1116, I reluctantly tried Claimyr. I'm shocked to admit it actually worked exactly as promised. They got me through to the IRS in about 25 minutes, and when I mentioned my specific UK tax situation, the agent transferred me to someone in their international division who was incredibly knowledgeable. The agent confirmed everything I needed for Form 1116 - that both UK income tax and National Insurance count as creditable taxes, explained how Part II should show each tax payment with dates (and that annual average exchange rates are acceptable for regular withholding), and even helped me understand how the carryover works if my foreign tax credit exceeds my US liability. Honestly never thought I'd say this about anything tax-related, but this was completely worth it.

Just wanted to add that the Form 1116 instructions are notorious for being confusing, even for experienced tax preparers. One thing that wasn't mentioned yet - make sure you're using the right category in Part I. For UK employment income, you'd check box "a" for "Passive category income." Also, don't forget that if your foreign tax credit exceeds your US tax liability on the foreign income, you can carry the excess back 1 year or forward up to 10 years. This is super helpful if you're in a higher tax country like the UK.

Has anyone else had issues with tax software correctly calculating Part III of Form 1116? I use TurboTax and it seems to be miscalculating my credit limitation.

I went through the exact same Form 1116 confusion when I moved to the UK! The instructions are absolutely terrible for newcomers to international tax filing. Just to reinforce what others have said - yes, both UK income tax AND National Insurance contributions qualify for the Foreign Tax Credit. This is explicitly stated in IRS Publication 514. Don't let anyone tell you otherwise. For Part II, think of it this way: Part I is about your income, Part II is about the taxes you paid on that income. So your UK salary goes in Part I, and the actual tax amounts withheld (both income tax and NI) go in Part II with the dates they were withheld. One thing I wish someone had told me earlier - keep really good records of your UK payslips and P60 because you'll need the exact amounts and dates for Form 1116. Also, the HMRC website has a great tool that shows you exactly how much income tax vs National Insurance you paid if you need to break it down. The exchange rate thing is annoying but manageable. I used the IRS annual average rates for simplicity since I had regular monthly withholding. If you had any lump sum payments or bonuses, you'd want to use the specific date rate for those. Hang in there - it gets easier once you understand the structure! Next year when you qualify for Form 2555, you'll have more options to optimize your tax situation.