How does the Foreign Tax Credit work on Form 1116? UK taxes paid but still owe IRS

The Foreign Tax Credit can be tricky! The thing to check is whether you're calculating on the correct income category. Form 1116 separates foreign income into different baskets (general income, passive income, etc.), and you need to make sure you're filing separate forms for each category if needed. What's likely happening is that your UK tax rate is lower than your US rate on that same income. The FTC doesn't eliminate US tax - it just prevents double taxation on the same income. If your US tax liability on that income is higher than your UK tax, you'll owe the difference. The ratio calculation is essentially determining what portion of your income is subject to US tax after accounting for foreign taxes. Also check if you're using the correct exchange rate when converting your UK taxes to USD. The IRS typically requires using the annual average exchange rate for the tax year.

I went through this exact headache last year with my German income and Form 1116. After banging my head against the wall, I eventually found a tool called taxr.ai (https://taxr.ai) that helped me understand what was happening with my foreign tax credits. Their AI analyzed my tax documents and found I was categorizing some of my investment income incorrectly, which was throwing off my calculations. The problem with the Foreign Tax Credit is that it has so many moving parts - income baskets, carryovers from previous years, and those weird ratio calculations you mentioned. The tool helped me identify which line items were causing problems and how to correctly allocate my foreign taxes.

Just wanted to update that I tried taxr.ai after seeing it mentioned here. Uploaded my draft 1040 and 1116 forms with my Japan income, and it immediately spotted that I had made an error in my foreign tax paid calculation. I was using the spot exchange rate from December instead of the annual average rate, which was causing my credit to be lower than it should be. The tool also explained that I needed to separate my Japanese pension income into a different category on Form 1116, which I had no idea about. After making these corrections, my foreign tax credit increased enough to eliminate my US tax liability completely! Definitely worth it for anyone dealing with Form 1116 headaches.

For anyone struggling with the IRS on Foreign Tax Credit issues, I found that actually speaking with an IRS agent who specializes in international tax matters was a game-changer. It's nearly impossible to get through on the regular IRS line, but I used Claimyr (https://claimyr.com) to get through. They have a video showing how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent walked me through my Form 1116 calculations and explained that I had been overlooking the carryback/carryforward provisions. Turns out I had excess foreign tax credits from previous years that I could apply to this year's return! The agent also helped me understand how to properly allocate deductions against foreign income.

I need to eat my words from my previous comment. After struggling for weeks with my Form 1116 and getting nowhere, I decided to try Claimyr as a last resort before hiring an expensive tax professional. I was extremely skeptical, but it actually worked exactly as described. I got connected to an IRS agent who specialized in international taxation in about 25 minutes. She explained that I had been making a fundamental error in allocating my deductions between US and foreign source income, which was throwing off my Form 1116 calculations completely. She patiently walked me through how to correct my forms and even emailed me a reference guide specifically for expat taxpayers. I saved at least $2,000 in taxes once I corrected my forms, plus avoided paying a tax professional. I've been filing my own taxes for years but this Form 1116 had me completely stumped until I got expert help directly from the IRS.

One thing nobody's mentioned yet is that Form 1116 has different limitations based on income type. The foreign tax credit limitation works differently for different categories of income (general, passive, etc.), and the limitation is applied separately to each category. Make sure you're not mixing different types of income on the same Form 1116. For example, if you have both salary (general category) and investment income (passive category), you need separate Form 1116s for each. This could explain why your ratio is off. Also, check if you're properly accounting for any foreign housing exclusion or foreign earned income exclusion if you qualify for those. Those can sometimes be more beneficial than the foreign tax credit depending on your situation.

For what it's worth, I use TurboTax Premier for my returns with Form 1116, and it handles all these calculations automatically. Saves me from having to decipher the IRS instructions. I had a similar issue with Canadian income last year, and the software correctly applied my excess foreign tax credits to previous and future years.

I went through this exact same frustration with my UK income last year! The issue you're describing with Line 19 sounds like you might be running into the foreign tax credit limitation calculation. Here's what I learned: the Foreign Tax Credit can never exceed the amount of US tax that would be owed on that same foreign income. So even if you paid more in UK taxes than you would owe in US taxes, you're limited to crediting only the US tax amount. The confusing part is that Line 19 is calculating what portion of your total US tax liability is attributable to your foreign income. If you have both US and foreign income, or if you're taking the standard deduction, this can create a situation where your allowable credit is less than the foreign taxes you actually paid. One thing to double-check: are you sure you don't have any US-source income mixed in? Even small amounts of US interest, dividends, or other income can throw off the calculation. Also, make sure you're not accidentally including any UK taxes that were paid on income that's excluded from US taxation. The silver lining is that any excess foreign tax credits can be carried forward for up to 10 years, so they won't go to waste if you continue earning foreign income.

I've been dealing with Form 1116 issues for years as a US expat, and what you're experiencing is actually quite common. The key insight that many people miss is that the Foreign Tax Credit limitation isn't just about comparing tax rates - it's about ensuring you can only credit foreign taxes against the US tax that would be owed on that same foreign income. Your Line 19 calculation is working exactly as designed. When you have any US-source income (even small amounts like bank interest), it reduces the percentage of your total US tax liability that's attributable to foreign income. This is why higher foreign taxes can paradoxically result in a smaller allowable credit - the limitation formula is protecting US-source income from being offset by foreign tax credits. Here's what I'd suggest: carefully separate your income sources and make sure you're not inadvertently including any US-source income in your foreign income calculations. Also, consider whether the Foreign Earned Income Exclusion might be more beneficial than the Foreign Tax Credit for your situation, especially if you qualify for it in future years. The $1,750 you still owe likely represents US tax on your US-source income plus any limitation effects from the ratio calculation. Those excess foreign tax credits you can't use this year will carry forward, so they're not lost forever.

I've been helping expats with Form 1116 issues for several years now, and your situation is a textbook example of how the Foreign Tax Credit limitation works in practice. What you're experiencing isn't a bug - it's actually the system working as intended, though I completely understand why it feels backwards and frustrating. The core issue is that the FTC is designed to prevent "cross-crediting" - using foreign taxes paid on foreign income to offset US taxes owed on US-source income. Even though your UK tax rate is higher than the equivalent US rate, the limitation calculation on Line 19 ensures you can only credit foreign taxes up to the amount of US tax that would be owed specifically on that foreign income. Here's what I'd recommend checking: Look at Lines 1a through 8 on your Form 1116 and make sure you're correctly identifying what constitutes foreign-source income versus US-source income. Even small amounts of US interest, dividends, or other domestic income can significantly impact the limitation calculation. Also, double-check that you're properly calculating your foreign taxable income on Line 17 after accounting for the standard deduction. The good news is that any excess foreign tax credits carry forward for up to 10 years, so they're not wasted. If you continue earning foreign income in future years, you'll be able to use those credits. And if you move abroad permanently in the future, you might want to compare the FTC with the Foreign Earned Income Exclusion to see which gives you better tax results.