On Form 1116, you must select the foreign tax credit income category that applies to the foreign-source income for which you are claiming a credit. The IRS generally requires a separate Form 1116 for each applicable category of income. Only one category box should be checked on each Form 1116.
Categories of Income
- Section 951A Category Income: Includes income described in Internal Revenue Code section 951A (Global Intangible Low-Taxed Income or GILTI). Foreign taxes associated with section 951A category income are generally subject to special foreign tax credit rules.
- Foreign Branch Category Income: Includes foreign-source business income attributable to a foreign branch or qualified business unit (QBU) of a U.S. person. This category generally applies to income earned through a foreign branch operation.
- Passive Category Income: Includes most investment-type income, such as dividends, interest, rents, royalties, annuities, and certain gains from property that produces passive income. This category generally applies unless the income is specifically assigned to another foreign tax credit category.
- General Category Income: Includes foreign-source income that is not assigned to another category. Examples commonly include wages, salaries, professional fees, self-employment income, active business income, and certain business-related gains.
Special Considerations
- Separate Forms Required: If you have foreign-source income in more than one category, you generally must complete a separate Form 1116 for each category. For example, foreign dividends may be reported on a Passive Category Form 1116, while foreign wages may require a General Category Form 1116.
- High-Taxed Income: Certain items of income may be subject to special foreign tax credit categorization rules under the Internal Revenue Code and Treasury Regulations. Depending on the applicable rules, income that is highly taxed by a foreign country may be assigned to a different foreign tax credit category. Follow the Form 1116 instructions for the applicable tax year when determining the proper category.
- Income Re-Sourced by Treaty: Certain income that is treated as foreign-source income under an income tax treaty may require a separate Form 1116 and separate foreign tax credit limitation calculation.
- Schedule B: Schedule B (Form 1116), Foreign Tax Carryover Reconciliation Schedule, is generally required when you are claiming a foreign tax credit carryover from another year or when the current year generates a foreign tax credit carryover.
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Disclaimer: Always verify details with the current year’s Federal or State Department of Revenue Forms and Instructions. For complex situations, consult a CPA or tax attorney.