Understanding Foreign Tax Credit Limits and Carry Forward/Back Options for 2025

You have excess foreign tax credits that can be carried forward. Your uncle is mixing up two different concepts. The limitation on your credit this year (25% × your total US tax) just determines how much you can use THIS year. But the excess foreign taxes you paid above that limit don't disappear - they become carryover credits. So in your case, you paid $8,100 in foreign taxes, but can only claim $2,062.50 as a credit this year due to the limitation. The remaining $6,037.50 becomes your carryover amount that you can use in the future (up to 10 years forward). The reason for this limitation is to prevent foreign taxes from offsetting US tax on US-source income. But the IRS recognizes you actually paid those taxes, which is why they let you carry them forward.

After struggling with a similar foreign tax credit situation last year, I found an amazing tool that saved me so much time and confusion. I used https://taxr.ai to analyze my foreign income documents and tax statements. Their system automatically calculated my foreign tax credit limitations and showed me exactly how much I could carry forward. What I liked most was that it explained the Form 1116 calculations in plain English while analyzing my documents, so I actually understood WHY I could carry forward the excess credits rather than just trusting what some software told me. It even predicted how my carryforward credits would apply in future years based on my current situation.

Just wanted to update after trying taxr.ai for my complicated foreign tax situation. It actually worked amazingly well! I uploaded my foreign tax documents from Japan and Germany, and it accurately separated my passive income and general income categories automatically. The system showed me that I'd been miscalculating my carryforward credits for years - I actually had about $3,500 more in usable credits than I realized. It gave me a complete breakdown of my Form 1116 calculations and showed exactly how much I can use this year vs carry forward. What really helped was the explanation of how the limitation works for each income category separately. Now I actually understand this stuff instead of just guessing and hoping I don't get audited!

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I have to admit I was wrong about Claimyr. After posting that skeptical comment, I was so frustrated with my foreign tax credit questions that I decided to try it anyway. It actually worked exactly as advertised. I got a call back in about 20 minutes and was connected to an IRS tax law specialist who clarified my specific questions about carryforward limits when you have income from multiple countries. Turns out I was eligible to use more of my carryforward credits from previous years than I thought, which saved me around $1,200 in taxes. The agent walked me through exactly how to document everything on Form 1116 to avoid any red flags. After spending literally days trying to get through on my own, this was absolutely worth it. I'm still shocked it actually worked.

Something important that hasn't been mentioned yet - the foreign tax credit carryback/carryforward rules changed a few years ago. You used to be able to carry back 1 year and forward 10 years, but now you can only carry forward 10 years (no carryback). So make sure you're not reading outdated info! This tripped me up last year because I was planning to amend my previous year's return to use some excess credits.

Another thing to watch for - if your foreign income comes from different categories (like passive investments vs active business income), you need separate Form 1116s for each category. The carryforward/limitations work independently for each category! I learned this the hard way. Had investment dividends from UK stocks (passive category) and consulting income from Canada (general category). They have to be tracked separately.

Your uncle is incorrect - you definitely have $6,037.50 in excess foreign tax credits that can be carried forward! The confusion comes from mixing up the annual limitation with the total credits available. Here's what's happening: The foreign tax credit limitation prevents you from using foreign taxes to offset US tax on US-source income. Since your foreign income is 25% of your total income, you can only use up to 25% of your US tax liability ($2,750 × 25% = $687.50) OR your actual foreign taxes paid ($8,100), whichever is SMALLER. Wait, I think there might be an error in your calculation - with a $2,750 US tax liability and 25% foreign income ratio, your limit should be $687.50, not $2,062.50. But regardless of the exact limitation amount, any foreign taxes you paid above that limit become carryforward credits that you can use in future years (up to 10 years forward). The IRS recognizes you actually paid those taxes to a foreign government, so they don't just disappear. I'd double-check your Form 1116 calculation - the limitation formula is: (Foreign source taxable income / Total taxable income) × Total US tax liability. Make sure you're using the right numbers in each part of that formula.

This is exactly the kind of confusion that trips up so many taxpayers with foreign income! You're absolutely right that you have significant carryforward credits available - your uncle is mixing up the limitation calculation with the actual credits you can carry forward. One thing I'd add to the excellent explanations already given: make sure you understand that the foreign tax credit limitation is calculated separately for different types of income. If all your foreign income falls into the "general category" (like wages, business income, etc.), then you'll have one calculation. But if you have passive income like dividends or interest, that gets calculated separately. Also, keep detailed records of your carryforward credits by year and category. The IRS can ask you to substantiate these amounts going back several years, especially since you'll potentially be using these credits for up to a decade. I recommend creating a simple tracking spreadsheet that shows the original year the credit was generated, the category, and how much you use each subsequent year. The key point everyone's made is correct - just because you can't use all your foreign tax credits in one year doesn't mean they disappear. The limitation exists to prevent foreign taxes from offsetting US tax on US-source income, but the IRS recognizes you actually paid those foreign taxes, hence the generous 10-year carryforward period.