Form 1116 passive vs general category is the first sorting decision in every foreign tax credit claim. Passive category income is mainly investment income: interest, dividends, rents and gains. General category income is mainly earned income: salary and self-employment profit. You file a separate Form 1116 for each category, and excess credit in one category cannot reduce US tax on income in the other.
For Americans in the UK, this sorting decides whether high UK Income Tax actually shelters UK investment income. Get it wrong and you either overclaim, inviting an IRS adjustment, or leave usable credits stranded. This guide explains the two categories individuals use most, the high-tax kick-out that moves income between them, and how UK income typically falls.
Why Form 1116 uses passive vs general category limits
Internal Revenue Code section 904(d) requires the foreign tax credit limitation to be calculated separately for each category of income. The rule stops taxpayers from using high foreign tax on salary to offset US tax on lightly taxed investment income. The categories are section 951A category income, foreign branch category income, passive category income and general category income, plus certain specified categories. Most individuals deal only with passive and general. The Instructions for Form 1116 define each one.
Passive category income
Passive category income generally includes dividends, interest, rents, royalties, annuities and net gains from selling investment property. It also covers distributions from passive foreign investment companies.
General category income
General category income is income that does not fall into another category. For individuals, that is mainly wages, salary, bonuses and self-employment or partnership trading income. UK pension payments attributable to past employment are usually treated as general category income too.
The high-tax kick-out
The high-tax kick-out in section 904(d)(2)(F) moves heavily taxed passive income into the general category. Passive income is "high-taxed" if the foreign tax on it exceeds the highest US rate under section 1 multiplied by that income. For 2026, the highest individual rate is 37% (IRS, 2026). As a result, passive income taxed abroad at more than 37% is treated as general category income on Form 1116.
Why this matters for UK investment income
UK tax rates on investment income frequently exceed 37%. Savings interest is taxed at 40% for higher-rate and 45% for additional-rate taxpayers (GOV.UK Income Tax rates). Dividends are taxed at 35.75% (upper) and 39.35% (additional) for 2026/27 (GOV.UK). Consequently, a higher-rate taxpayer's UK interest, and an additional-rate taxpayer's UK dividends, are often kicked out of passive and into general. Basic-rate investment income, taxed at 20% or 10.75%, usually stays passive.
| UK income (2026/27) | UK rate | Starting category | Category after high-tax kick-out |
|---|---|---|---|
| PAYE salary | 20% / 40% / 45% | General | General |
| Bank interest, basic-rate taxpayer | 20% | Passive | Passive |
| Bank interest, higher-rate taxpayer | 40% | Passive | General (above 37%) |
| Dividends, higher-rate taxpayer | 35.75% | Passive | Must be tested; see note on qualified dividends |
| Dividends, additional-rate taxpayer | 39.35% | Passive | General (above 37%) |
| Rental profit, higher-rate taxpayer | 40% | Passive | General (above 37%) |
These are simplified effective rates. Qualified dividends need extra care: the capital gain rate differential adjustment under section 904(b)(2) can reduce the income used in the test, which raises the effective foreign rate and can move higher-rate UK dividends into the general category too. The test is applied to groups of income after allocating deductions, and allowances such as the UK Personal Savings Allowance reduce the actual tax rate. Therefore, the outcome must be computed, not assumed.
How passive vs general category sorting changes your US tax
UK residents usually generate excess foreign tax credits in the general category, because UK Income Tax on salary exceeds US tax. Excess general credits cannot be used against passive income. If heavily taxed UK interest moves into the general category, it joins income that is already fully sheltered. If lightly taxed passive income stays in the passive category, any shortfall there produces a US top-up tax.
Carryovers stay in their category
Unused credits carry back one year and forward ten years under section 904(c), but only within the same category. Our guide to the foreign tax credit carryover and Schedule B shows how to track them by category.
Re-sourced income: a third Form 1116
For US citizens in the UK, US-source dividends and interest can sometimes be re-sourced as foreign under the UK-US Income Tax Treaty. Income re-sourced by treaty goes on its own separate Form 1116, not in the ordinary passive category. Our guide to treaty re-sourcing on Form 1116 explains when this applies.
An illustrative case
Consider an illustrative US citizen in London with a £120,000 salary, £4,000 of UK bank interest and £3,000 of UK dividends in 2026/27. The figures are illustrative. Their salary sits in the general category with large excess credits. Their interest, taxed at 40%, is high-taxed, so it moves into the general category and is fully sheltered. Their dividends, taxed at 35.75%, must be tested after the capital gain rate differential adjustment, which may move them into the general category as well. They file a Form 1116 for each category that has income, and carry the excess general credits forward. Had the interest been left in passive, the return would have been wrong, although the tax difference here is small.
Common mistakes
Several errors recur. Filers put all UK tax on one Form 1116. Others ignore the high-tax kick-out entirely. Some include UK National Insurance, which is not creditable. Finally, many use the simplified election for small amounts when they do not qualify; our guide to the foreign tax credit without Form 1116 explains its limits. Our US expat tax returns page covers the wider filing picture.
If your UK income spans salary and investments and you are unsure about Form 1116 passive vs general category sorting, book a consultation with our foreign tax credit team. We sort every item into the right category and keep your carryovers intact.
Frequently Asked Questions
What is the difference between passive and general category income on Form 1116?
On Form 1116, passive vs general category is decided by the type of income. Passive category income is mainly investment income such as interest, dividends, rents and investment gains. General category income is mainly earned income such as salary and self-employment profit. Each category needs its own Form 1116, and excess credits in one cannot offset US tax on the other.
What is the high-tax kick-out?
The high-tax kick-out in Internal Revenue Code section 904(d)(2)(F) treats passive income as general category income if the foreign tax on it exceeds the highest US individual rate, 37% for 2026. UK interest taxed at 40% or 45% and UK dividends taxed at 39.35% are common examples.
Is UK salary passive or general category income?
UK salary is general category income. Most US citizens in the UK generate excess foreign tax credits in the general category, because UK Income Tax on salary usually exceeds US tax on the same income.
Do I need more than one Form 1116?
Yes, if you have foreign income in more than one category. You file one Form 1116 per category, such as one for passive and one for general, plus a separate one for any income re-sourced under a tax treaty.
Can I use excess general category credits against passive income?
No. Section 904(d) requires a separate limitation for each category, so excess credits in the general category cannot reduce US tax on passive category income. Unused credits carry back one year and forward ten years within the same category.
Are UK dividends passive category income?
UK dividends start in the passive category. However, if the UK tax on them is high-taxed under the section 904(d)(2)(F) test, as with the 39.35% additional dividend rate for 2026/27, the high-tax kick-out moves them into the general category. For qualified dividends, the capital gain rate differential adjustment can make higher-rate dividends high-taxed too.
Talk to a real, signing professional
AI precision, human accountability — across the US, UK & UAE.
Book a free consultation