Can foreign tax credits offset the net investment income tax?

Ask an American in Paris or Toronto why they owe the IRS after paying more tax at home than they would have paid in the United States, and the answer is almost always the 3.8%. The foreign tax credit works exactly as designed on the regular income tax and reaches nothing else. This page sets out why, what was argued against it, and where that argument now stands.

The Code: two chapters, one credit

The foreign tax credit is created by §27 and allowed by §901(a). Both speak of a credit against "the tax imposed by this chapter", and "this chapter" is chapter 1 of subtitle A — the normal taxes and surtaxes. Section 901(a) adds that the credit "shall not be allowed against any tax treated as a tax not imposed by this chapter under section 26(b)", and §26(b) lists more than two dozen such taxes. The NIIT was enacted in 2010 as §1411, alone in a new chapter 2A. It is not a chapter 1 tax, and the credit does not reach it.

Every court to consider the point has read the statute this way — the Tax Court in Toulouse v. Commissioner (157 T.C. 49 (2021)), the Central District of California in Kim v. United States (2023), and, as an independent ground in both 2026 opinions, the Federal Circuit. The taxpayers in the treaty cases did not dispute it either; their argument was that the treaty supplied a credit the Code did not.

The treaty argument, and what became of it

The US–France Convention (Article 24) and the US–Canada Convention (Article XXIV) each promise a credit for the other country's income tax against "United States tax" — a term both treaties define broadly enough to include the NIIT, as the government conceded. Each article opens with the words "in accordance with the provisions and subject to the limitations of the law of the United States" — the U.S. Law Limitation — and each has a second credit clause specific to US citizens resident in the other country that does not repeat those words.

Two Court of Federal Claims judges held that the citizen-resident clauses (Article 24(2)(b) for France, Article XXIV(4)(b) for Canada — or, on the Bruyea court's reading, Article XXIV(1) itself) created a treaty credit that stood outside §§27 and 901(a) and could therefore be taken against the NIIT. The government appealed both.

What did not change

• Form 1116 against regular tax. French and Canadian income tax on dividends, interest, gains and rents is still creditable against the chapter 1 tax on that income, subject to §904's source-based limit.
• Treaty re-sourcing. The provisions that treat certain US-source income as foreign-source for a citizen resident in France or Canada still operate — for the Form 1116 credit. The Federal Circuit relied on them as evidence that the treaty credit lives inside the Code.
• The line 9b deduction. Foreign income tax that is itemised and allocable to investment income may still reduce net investment income on Form 8960. It was never a credit and the decisions do not touch it.
• Everything else in the treaties. Pension articles, social-security articles, the tie-breaker, the saving clause and its exceptions are unaffected.

What it means in numbers

A single US citizen in Lyon with $120,000 of excluded salary and a $90,000 gain on French shares pays French tax at the 30% flat rate — $27,000. Her US regular tax on the gain is roughly $13,500, and Form 1116 takes it to zero with credit to spare. Her MAGI is $210,000, $200,000 is the threshold, the excess is $10,000, and Form 8960 line 17 is $380. That $380 is the whole of her US bill. Nothing in the $27,000 she paid France can be set against it; had the Court of Federal Claims been affirmed, it could have been.

Scale the gain to $600,000 — a business sold, a property in Vancouver — and the surviving tax is 3.8% of the whole excess over the threshold, which is what the Bruyea estate was litigating.

What to review now

1. Any return on which a treaty-based credit was taken against Form 8960 — typically with a Form 8833 disclosure — is a position the controlling court has rejected. Talk to whoever prepared it about amending, and about the interest exposure.
2. Any protective refund claim filed while the appeals were pending is now unlikely to succeed unless the Supreme Court takes the cases; the windows for rehearing and certiorari are set out below.
3. For the current year, plan on the 3.8% as a real cost of foreign investment income above the threshold, and compare the line 9b deduction against the Form 1116 credit before filing — but expect the credit to win.
4. Where the foreign tax is on income the treaty lets the other country tax first, make sure the re-sourcing rule is applied on Form 1116 so the credit against regular tax is not lost to §904.

Reviewed against the opinions on 2026-09-15. Rehearing and certiorari windows are open as of 2026-09-15 (rehearing petition due within 45 days of the August 31, 2026 judgment; certiorari within 90 days of judgment or of a rehearing denial). No petition had been docketed when this record was last checked. The docket is re-checked by 2026-10-16; if the status changes, this page changes with it.