Categories of Income — 2025 Inst 1116 (PDF)

Use a separate Form 1116 to figure the credit for each category of foreign source income listed above Part I of Form 1116. The following instructions tell you what kind of income to include in each category. For more information, see Pub. 514, section 904, and Regulations sections 1.904-4 and 1.904-5.

a. Section 951A Category Income Section 951A category income includes any amount included in gross income under section 951A (other than passive category income). Section 951A category income is otherwise referred to as “global intangible low-taxed income (GILTI)” and is included by U.S. shareholders of certain CFCs. See Pub. 514 for additional details.

b. Foreign Branch Category Income Foreign branch category income consists of the business profits of U.S. persons that are attributable to one or more QBUs in one or more foreign countries. Foreign branch category income doesn’t include any passive category income. See Pub. 514 for further information.

c. Passive Category Income Passive category income consists of passive income and specified passive category income.

Compensation for services performed outside the United States.
Interest income from a payer located outside the United States.
Dividends from a corporation incorporated outside the United States.
Subpart F income inclusions and section 951A category income inclusions.

Instructions for Form 1116 (2025) 5

Passive category income doesn’t include gain from the sale of inventory or property held primarily for sale to customers in the ordinary course of your trade or business; gain from commodities hedging transactions; and active business gains or losses of producers, processors, merchants, or handlers of commodities. It may also not include dividends, interest, rents, or royalties received from a CFC in which you are a U.S. shareholder who owns 10% or more of the total voting power or the total value of all classes of the corporation’s stock.

Passive income. Passive income generally includes dividends, interest, royalties, rents, annuities, excess of gains over losses from the sale of property that produces such income or of non-income-producing investment property, and excess of gains over losses from foreign currency or commodities transactions. Capital gains not related to the active conduct of a trade or business are also generally passive income.

Passive income doesn’t include export financing interest, active business rents and royalties, or high-taxed income. High-taxed income is income if the foreign taxes you paid on the income (after allocation of expenses) exceed the highest U.S. tax that can be imposed on the income.

Passive income also doesn’t include financial services income derived by a financial services entity. You are a financial services entity if you are predominantly engaged in the active conduct of a banking, insurance, financing, or similar business for the tax year. Financial services income of a financial services entity generally includes income derived in the active conduct of a banking, financing, insurance, or similar business. If you qualify as a financial services entity because you treat certain items of income as active financing income under Regulations section 1.904-4(e)(2)(i)(Y), you must show the type and amount of each item on an attachment to Form 1116.

Specified passive category income. Dividends from a domestic international sales corporation (DISC) or former DISC to the extent they are treated as foreign source income, and certain distributions from a former foreign sales corporation (FSC) are specified passive category income.

d. General Category Income General category income is income that isn’t section 951A category income, foreign branch category income, passive category income, or income described in categories e, f, and g, discussed later. General category income may include the following.

Note: A foreign tax credit may be claimed for foreign taxes paid or accrued with respect to section 901(j) income if such tax is paid or accrued to a country other than a sanctioned country. For example, if a U.S. citizen resident in a non-sanctioned country pays a residence-based income tax in that country on income derived from business activities in a sanctioned country, those foreign taxes would be eligible for a foreign tax credit. In this situation, you would continue completing Form 1116 and not stop at line 17.

Sanctioned countries are those designated by the Secretary of State as countries that repeatedly provide support for acts of international terrorism, countries with which the United States doesn’t have or doesn’t conduct diplomatic relations, or countries whose governments aren’t recognized by the United States and aren’t otherwise eligible to purchase defense articles or services under the Arms Export Control Act. Pub. 514 contains a list of these countries.

If you paid taxes to a country that ceased to be a sanctioned country during the tax year, see Pub. 514 for details on how to figure the foreign tax credit for the period that begins after the end of the sanctions.

Presidential waiver. The President of the United States has the authority to waive the denial of the credit with respect to a sanctioned country if:

The waiver is in the national interest of the United States and will expand trade and investment opportunities for U.S. companies in the sanctioned country; and
The President reports to Congress, not less than 30 days before the waiver is granted, the intention to grant the waiver and the reason for the waiver.
Wages, salary, and overseas allowances of an individual as an employee.
Income earned in the active conduct of a trade or business.
Gains from the sale of inventory or depreciable property used in a trade or business. See Pub. 514 for additional details.

e. Section 901(j) Income No credit is allowed for foreign taxes imposed by and paid or accrued to certain sanctioned countries. However, income derived from each sanctioned country is subject to a separate foreign tax credit limitation. Therefore, you must use a separate Form 1116 for income derived from each sanctioned country. Because no credit is allowed for taxes paid to sanctioned countries, you would generally complete Form 1116 for this category only through line 17.

f. Certain Income Re-Sourced by Treaty If a sourcing rule in an applicable income tax treaty treats U.S. source income as foreign source, and you elect to apply the treaty, the income will be treated as foreign source.

Important: You must compute a separate foreign tax credit limitation for any income for which you claim benefits under a treaty, using a separate Form 1116 for each amount of re-sourced income from a treaty country. This rule doesn’t apply to income that is re-sourced by reason of the relief from double taxation rules in any U.S. income tax treaty that is solely applicable to U.S. citizens who are residents of the foreign treaty country. See sections 865(h), 904(d)(6), and 904(h)(10) and the regulations under those sections (including 1.904-4(k)) for any grouping rules and other exceptions. Add the amounts from line 24 of each separate Form 1116 and enter the total on line 30 of your summary Form 1116 (that is, the Form 1116 for which you are completing Part IV). In addition, you may be required to file Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), for the re-sourced income.

g. Lump-Sum Distributions You can take a foreign tax credit for taxes you paid or accrued on a foreign source lump-sum distribution from a pension plan. Special formulas may be used to figure a separate tax on a qualified lump-sum distribution for the year in which the distribution is received. See Pub. 575 for more information.

If you are able to elect, and do elect, to figure your U.S. tax on a lump-sum distribution using Form 4972, Tax on Lump-Sum Distributions, a separate foreign tax credit limitation applies. Use a separate Form 1116. On this separate Form 1116, check box g above Part I. Skip Part I.

6 Instructions for Form 1116 (2025)

Worksheet for Lump-Sum Distributions Keep for Your Records

1. Enter the amount from Form 1116, line 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.

2. Enter the sum of the amounts from Form 4972, lines 6 and 12, that are from foreign sources. Also enter this amount on Form 1116, line 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.

3. Enter the sum of the amounts from Form 4972, lines 6 and 12, that are from all sources (both U.S. and foreign). Also enter this amount on Form 1116, line 18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.

4. Divide line 2 by line 3. Enter the result as a decimal (rounded to at least four places) here and on Form 1116, line 19. If line 2 is equal to or more than line 3, enter “1” . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.

5. Enter the amount from Form 4972, line 30. Also include this amount on Form 1116, line 20 . . . . . . . . . 5.

Caution: Don’t include the amount on line 5 above in the tax you enter on line 20 of any other

Form 1116 you are filing.

6. Multiply line 5 by line 4. Enter the result here and on Form 1116, line 21 . . . . . . . . . . . . . . . . . . . . . . . . 6.

7. Enter the smaller of line 1 or line 6 here and on Form 1116, line 24. To the left of line 24, enter “LSD” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.

Complete Part II showing only foreign taxes that are attributable to the lump-sum distribution. Then, complete the Worksheet for Lump-Sum Distributions to figure the amounts to enter in Part III.