NIIT Foreign Tax Credit: Why UK Tax Cannot Offset the 3.8% Tax After Christensen

The NIIT foreign tax credit question has a settled answer: US citizens cannot use foreign tax credits to reduce the 3.8% Net Investment Income Tax. The NIIT sits in Chapter 2A of the Internal Revenue Code, and sections 27 and 901 allow credits only against Chapter 1 income tax. On 31 August 2026 the Federal Circuit confirmed this applies even under a tax treaty.

For Americans in the UK, this is one of the few places where double taxation genuinely survives. UK tax on dividends, interest, rent and capital gains can wipe out the regular US income tax through Form 1116, yet a 3.8% US surtax may still be due. This guide explains why, what the recent court decisions mean, and what planning still helps.

What the Net Investment Income Tax is

The Net Investment Income Tax (NIIT) is a 3.8% tax under Internal Revenue Code section 1411. It applies to the lesser of your net investment income or the amount by which your modified adjusted gross income (MAGI) exceeds a threshold. You calculate it on Form 8960.

NIIT thresholds

According to the IRS Net Investment Income Tax page, the thresholds are fixed by statute and not indexed for inflation. They apply for 2025, 2026 and later years unless Congress changes them.

What counts as net investment income

Net investment income includes interest, dividends, capital gains, rental income and passive business income, less properly allocable deductions. Wages and active trading income are excluded. Our guide to the net investment income tax for high earners covers the calculation in more depth.

Why the NIIT foreign tax credit is not allowed

The foreign tax credit under section 901, claimed on Form 1116, reduces tax imposed by Chapter 1 of the Code. Section 27 makes the same link. The NIIT is imposed by Chapter 2A, a separate chapter, so the statutory credit does not reach it. Treasury Regulation section 1.1411-1(e) states this directly.

Toulouse in the Tax Court

In Toulouse v. Commissioner, 157 T.C. 49 (2021), the Tax Court rejected a US citizen's claim that the US-France and US-Italy treaties allowed a credit against the NIIT. The court held that the treaties gave credits only as allowed under US law.

Christensen and Bruyea in the Federal Circuit

In October 2023, the Court of Federal Claims ruled for the Christensens, a US couple living in France, finding that Article 24 of the US-France treaty allowed a credit against the NIIT. That ruling encouraged many protective refund claims by Americans abroad. On 31 August 2026, the US Court of Appeals for the Federal Circuit reversed it in Christensen v. United States, No. 2024-1284, and decided the Canadian companion case, Estate of Bruyea v. United States, No. 2025-1563, the same way. The court held that the treaties' double taxation articles make relief subject to US statutory limits, so they create no independent credit against Chapter 2A tax.

What this means under the US-UK treaty

Article 24(4)(a) of the 2001 US-UK income tax treaty, the double taxation relief article, also grants the US foreign tax credit in accordance with, and subject to the limitations of, US law. That wording mirrors the language the Federal Circuit relied on. As a result, a treaty-based NIIT credit position for a UK-resident US citizen is now very weak. Any such position would also need a treaty disclosure on Form 8833. Our UK-US tax treaty pillar explains how Article 24 works for regular income tax.

Protective refund claims

Many Americans abroad filed protective claims while Christensen was on appeal. Following the Federal Circuit decision, those claims are unlikely to succeed. Check with your adviser before abandoning one, because commentators were still monitoring for any rehearing or Supreme Court petition when this article was written.

How the NIIT interacts with the FEIE and UK tax

Two more rules often surprise Americans in the UK and UAE.

Excluded foreign earned income is added back to MAGI

For the NIIT, MAGI adds back any foreign earned income excluded on Form 2555. A London salary excluded under the FEIE can therefore push MAGI over the threshold, even though the salary itself is not investment income. Our comparison of the FEIE versus the foreign tax credit covers the wider trade-off.

An illustrative example

Consider a married American couple in London filing jointly with $230,000 of UK salary and $60,000 of UK dividends and gains in 2026. MAGI is $290,000, which is $40,000 above the $250,000 threshold. The NIIT applies to the lesser of $60,000 and $40,000, so 3.8% of $40,000 gives $1,520. UK tax credited on Form 1116 removes the regular US tax on the dividends, but not this $1,520. The figures are illustrative.

Planning that still helps

The credit route is closed, but the NIIT can still be managed.

• Deducting foreign taxes: under Treasury Regulation section 1.1411-4(f), foreign income taxes can reduce net investment income only if you deduct them for regular tax purposes rather than credit them. That trade-off rarely pays, but it should be modelled for some investors.
• Timing gains: spreading large disposals across tax years can keep MAGI nearer the threshold.
• UK tax-free wrappers: ISA income is taxable in the US and counts for the NIIT, so wrappers do not avoid it; see our guide to ISA tax for US citizens.
• Non-resident spouses: the NIIT does not apply to nonresident aliens, which can affect whether married couples elect joint filing.

Frequently Asked Questions

Can foreign tax credits offset the Net Investment Income Tax?

No. The foreign tax credit under Internal Revenue Code sections 27 and 901 applies only to income tax under Chapter 1, while the 3.8% Net Investment Income Tax is imposed by section 1411 in Chapter 2A. The Federal Circuit confirmed on 31 August 2026 in Christensen and Bruyea that tax treaties do not override this limit.

Does the US-UK tax treaty allow a foreign tax credit against the NIIT?

Very unlikely. Article 24(4)(a) of the US-UK income tax treaty grants the US foreign tax credit subject to the limitations of US law, which is the same type of wording the Federal Circuit relied on in Christensen in August 2026. A UK-resident US citizen claiming a treaty-based NIIT credit would also need to file Form 8833.

What are the NIIT thresholds for 2026?

The IRS states the Net Investment Income Tax thresholds are $250,000 for married filing jointly, $200,000 for single and head of household filers, and $125,000 for married filing separately. These amounts are set by statute and are not indexed for inflation, so they are the same for 2025 and 2026.

Does the foreign earned income exclusion reduce MAGI for the NIIT?

No. For the Net Investment Income Tax, modified adjusted gross income adds back foreign earned income excluded on Form 2555. A US citizen in the UK or UAE whose salary is excluded under the FEIE can therefore exceed the NIIT threshold even though the excluded wages are not themselves net investment income.

Do US citizens living in the UAE pay the NIIT?

Yes, if their income exceeds the thresholds. The NIIT applies to US citizens wherever they live. Because the UAE levies no personal income tax on dividends, interest or gains, there is usually no foreign tax to credit anyway, so the full 3.8% NIIT and regular US income tax may be due on investment income.

What happened in Christensen v. United States?

In October 2023, the Court of Federal Claims allowed a US couple in France to credit French tax against the Net Investment Income Tax under the US-France treaty. On 31 August 2026, the Federal Circuit reversed that decision, holding that the treaty makes credit relief subject to US law, which allows foreign tax credits only against Chapter 1 income tax.

Do UK ISAs count for the Net Investment Income Tax?

Yes. UK ISAs are not tax-exempt for US purposes, so interest, dividends and gains inside an ISA are reported on the US return and form part of net investment income. Because HMRC charges no UK tax on ISA income, there is also no UK tax available to credit on Form 1116.

Plan around the 3.8% you cannot credit

The NIIT is one of the few US taxes Americans in the UK cannot credit away. Tranzesta models the NIIT alongside Form 1116 and the FEIE so you can see the real cost before you sell, invest or choose a filing status. Book a consultation with our cross-border team.