U.S. · Tax forms
Form 1116 line 12, reduction in foreign taxes.
The situations in which the foreign taxes you paid or accrued must be cut down before the credit is figured.
Line 12 is where you reduce foreign taxes paid or accrued, in Part III of the form. The instructions list nine items: taxes on income excluded on Form 2555, Puerto Rico exempt income, American Samoa income excluded on Form 4563, combined foreign oil and gas income, foreign mineral income, 10% failure-to-file reductions for Forms 5471 and 8865, international boycott operations, and foreign tax credit splitting events. The amount is entered in parentheses.
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Items that can reduce foreign taxes on line 12
| Item | Type | What the IRS says |
|---|---|---|
| Form 2555 excluded income | Reduction | Reduce taxes paid or accrued by the taxes allocable to foreign earned income excluded on Form 2555. If only part is excluded, multiply the foreign taxes on foreign earned income by a fraction: excluded foreign earned income and housing amounts minus otherwise deductible expenses, over total foreign earned income minus deductible expenses. |
| Puerto Rico exempt income | Reduction | Applies if you have Puerto Rican source income that is not taxable on your U.S. return. Reduce foreign taxes by the taxes allocable to the exempt income. See Pub. 570. |
| American Samoa, Form 4563 | Reduction | A bona fide resident of American Samoa reduces taxes by any taxes attributable to American Samoa source income excluded on Form 4563. See Pub. 570. |
| Combined foreign oil and gas income | Reduction | Reduce by the amount by which foreign oil and gas taxes exceed combined foreign oil and gas income multiplied by pre-credit U.S. tax liability divided by worldwide taxable income. Carryover rules are in section 907(f). |
| Foreign mineral income | Reduction | Reduce taxes paid or accrued on mineral income from a foreign country or U.S. territory if you took a percentage depletion deduction under section 613 for any part of it. |
| Failure to file Form 5471 | Penalty reduction | If you do not file Form 5471 with all required information by the due date of your return, reduce by 10% all foreign taxes you may otherwise take into account. Further reductions may apply if the failure continues. |
| Failure to file Form 8865 | Penalty reduction | The same 10% reduction applies to U.S. partners who control a foreign partnership and do not file Form 8865 with all required information by the due date. |
| International boycott operations | Reduction | Reduce either the total taxes available for credit or the credit otherwise allowable. If you can figure the taxes specifically attributable to boycott operations, enter them on line 12; otherwise use the boycott factor from Schedule A (Form 5713) and enter the result on line 34. |
| Foreign tax credit splitting event | Reduction | Reduce taxes paid or accrued with respect to a splitting event under section 909, where the related income is or will be taken into account by a covered person. |
Where line 12 fits in Part III
Line 12 is in Part III, “Figuring the Credit.” Part II lists the foreign taxes you paid or accrued and totals them on line 8. In Part III, line 9 repeats that total for the category checked above Part I, line 10 adds any carryover or carryback of foreign taxes, and line 11 adds lines 9 and 10. Line 12, “Reduction in foreign taxes (see instructions),” is printed in parentheses, so the amount comes off the total. Line 13 handles taxes reclassified under the high tax kickout, and line 14 combines lines 11, 12, and 13 into “the total amount of foreign taxes available for credit.” Line 24 later takes the smaller of line 14 or line 23, so every dollar on line 12 can lower the credit.
The Form 2555 fraction
The most common reduction applies to people who excluded some foreign earned income on Form 2555. Foreign tax paid on income you excluded cannot also be credited. If you excluded all of it, the taxes allocable to it come off in full. If only part was excluded, you compute the share by multiplying the foreign taxes on foreign earned income received or accrued during the year by a fraction. The numerator is the foreign earned income and housing amounts you excluded minus otherwise deductible expenses (not including the foreign housing deduction) allocable to that income. The denominator is your total foreign earned income minus deductible expenses (including the foreign housing deduction) allocable to it. If the foreign jurisdiction taxes earned income together with other income and the tax cannot be segregated, the denominator becomes the total income subject to foreign tax minus allocable deductible expenses.
Made-up example. A taxpayer paid $10,000 in foreign tax on foreign earned income. The numerator is $60,000 and the denominator is $80,000, so the fraction is 0.75. The reduction on line 12 is $7,500, leaving $2,500 of taxes for the credit. These figures are invented to show the arithmetic; the IRS gives no dollar example for this item.
The 10% penalty reductions
Two of the items are penalties in disguise. A U.S. person who controls a foreign corporation must file Form 5471, and a U.S. partner who controls a foreign partnership must file Form 8865. If the form and all its required information are not filed by the due date of your tax return, you reduce by 10% all foreign taxes you might otherwise take into account for the credit. The instructions point to section 6038(c) and the regulations for additional reductions and exceptions, and they note that the reduction is itself reduced by any dollar penalty imposed under section 6038(b).
Industry and territory items
The remaining items are narrower. Puerto Rico and American Samoa residents reduce for taxes on income that is not taxed on the U.S. return, and the instructions send you to Pub. 570. Oil and gas taxpayers use a formula comparing foreign oil and gas taxes to combined foreign oil and gas income, defined as foreign oil-related income plus foreign oil and gas extraction income. Taxpayers who deducted percentage depletion on foreign mineral income reduce for the related taxes. Boycott participants and taxpayers with a splitting event under section 909 have their own rules, and a covered asset acquisition under section 901(m) is not a splitting event under section 909.
More line pages in this set
Related lines: Form 1116 Lines 15 and 16, Form 1116 Line 18, Form 1116 Line 1a.
Sources
- Instructions for Form 1116 (2025): the line-by-line instructions on this page. Read November 2, 2026.
- Form 1116 (2025), Foreign Tax Credit (Individual, Estate, or Trust): the printed line wording and arithmetic on the form. Read November 2, 2026.
Instructions for Form 1116, 2025 edition. The line labels were read from the Form 1116 (2025) PDF the IRS had posted on the date read. Line numbers can shift between years, so check them against the form for your tax year. Examples marked made-up use invented figures; the others reproduce the IRS's own examples.
Frequently asked questions
What is Form 1116 line 12?
The reduction in foreign taxes paid or accrued, entered in parentheses in Part III before the total foreign taxes available for credit is figured on line 14.
How do I reduce taxes for income excluded on Form 2555?
Multiply the foreign taxes on foreign earned income by a fraction whose numerator is the excluded foreign earned income and housing amounts minus allocable deductible expenses and whose denominator is total foreign earned income minus allocable deductible expenses.
What happens if I do not file Form 5471 or Form 8865 on time?
You reduce by 10% all foreign taxes you may otherwise take into account for the credit, and further reductions may apply if the failure continues.
Is there a reduction for international boycott operations?
Yes. If you can figure the taxes attributable to boycott operations, enter them on line 12; if not, multiply the credit otherwise allowable by the international boycott factor and enter the result on line 34.
Where can I read more about Puerto Rico and American Samoa reductions?
The instructions refer to Pub. 570 for both.
Not tax advice
This page summarizes IRS instructions, mostly written for the people who prepare the form, and is not tax, legal or financial advice. A CPA or an enrolled agent can confirm what a line means for your return. Everything runs in your browser; nothing you enter is sent anywhere.