Avoiding Double Tax NZ to US: A Foreign Tax Credit Worked Example on $95,000 Salary
If you earn a NZ salary, the foreign tax credit (FTC) on Form 1116 almost always wipes out your US tax on that salary — because New Zealand's effective rate is higher than the US rate at most income levels. The catch is that this same generosity does not rescue you from US tax on your KiwiSaver or PIE funds: that PFIC tax sits in a separate "passive" basket where your spare NZ salary credits can't reach it.
The double-tax problem in one sentence
As a US citizen living in New Zealand, you stay in the US tax net for life. The US taxes your worldwide income; New Zealand taxes the same income because you live and work there. The two main tools that stop you paying full freight twice are the Foreign Earned Income Exclusion (FEIE, Form 2555) and the Foreign Tax Credit (FTC, Form 1116). For most NZ-based filers the FTC is the workhorse, because NZ tax is high enough to cover your US bill and leave credits to spare.
This guide walks through the FTC on a NZ$95,000 salary line by line, then shows the trap that catches almost everyone: why the leftover credits sit idle while your KiwiSaver gets taxed anyway.
Meet Daniel. US citizen, software developer in Wellington, single, no kids. Salary: NZ$95,000. He also holds a KiwiSaver balanced fund and a NZ PIE share fund. All figures below are NZ dollars and use the resident individual rates that took effect 1 April 2025 (source: Inland Revenue). We ignore the ACC earner's levy here because it is not an income tax and is generally not creditable.
Step 1 — Daniel's NZ income tax on $95,000. NZ rates are progressive, so each band is taxed at its own rate:
| NZ income band | Rate | Tax on the band |
|---|---|---|
| $0 – $15,600 | 10.5% | $1,638.00 |
| $15,601 – $53,500 | 17.5% | $6,632.50 |
| $53,501 – $78,100 | 30% | $7,380.00 |
| $78,101 – $95,000 | 33% | $5,577.00 |
| Total NZ income tax | — | $21,227.50 |
Daniel's effective NZ rate on salary is $21,227.50 ÷ $95,000 = 22.3%, even though his top marginal rate is 33%.
Step 2 — estimate the US tax on the same salary. Daniel converts $95,000 to USD for his US return (say roughly US$57,000 at an illustrative ~0.60 rate — you use the IRS yearly average or transaction-date rate). After the US standard deduction, his US tax on that wage, taxed in the US "general category", is far smaller than the NZ tax he paid — in this scenario the US tax on the salary works out to roughly US$4,800–$5,200.
Step 3 — run Form 1116 (general category). Daniel reports his NZ wage as foreign general-category income and his NZ income tax as the foreign tax paid. The form caps the credit at the US tax attributable to that foreign income (the "FTC limitation"). Because his NZ tax (~US$12,700 equivalent on the salary) is much larger than the US tax on the salary (~US$5,000), the credit fully offsets the US salary tax.
| Form 1116 (general basket) | Amount (USD, illustrative) |
|---|---|
| US tax on the NZ salary (the limit) | ~$5,000 |
| NZ tax available as a credit | ~$12,700 |
| Credit actually used this year | $5,000 |
| US tax owed on the salary | $0 |
| Excess NZ credit left over (general basket) | ~$7,700 |
Result: US tax on the salary is zero. Daniel even has roughly US$7,700 of excess general-basket credit. The instinctive question is "great — can that cover the tax on my KiwiSaver?" The answer, frustratingly, is usually no. That is the whole point of this article.
Why NZ's higher rate zeroes US salary tax but leaves PFIC tax uncredited
Two separate mechanics combine to produce the trap.
1. NZ is a "high-tax" country for salary. At Daniel's income, NZ's effective rate (~22%, rising toward 33% marginal) beats the US rate on the same dollars. So the FTC limitation — which caps your credit at the US tax on that income — bites before you run out of NZ tax. You exhaust the US liability and still have credit sitting there.
2. The credit is locked inside its basket. The foreign tax credit is not one big pool. The IRS requires you to compute the limitation separately for each category of income. Per IRS Publication 514, the main categories you'll meet are general category income (wages, business income) and passive category income (dividends, interest, and similar investment income). There are also section 951A (GILTI), foreign branch, section 901(j), and treaty-resourced baskets, but salary and fund income are the two that matter here.
Your NZ salary tax lands in the general basket. Your KiwiSaver/PIE tax lands in the passive basket. The rule is unforgiving: credits in one basket cannot offset US tax in another. Daniel's ~US$7,700 of excess general-basket credit simply cannot touch the US tax generated by his PFIC funds.
Why KiwiSaver and PIE income is passive (and a PFIC)
KiwiSaver schemes and NZ Portfolio Investment Entities (PIEs) are pooled funds that hold shares, bonds and cash. Substantially all their income is dividends, interest and capital gains, and substantially all their assets produce passive income — so they meet the US definition of a Passive Foreign Investment Company (PFIC), reported each year on Form 8621. The income they generate for your US return is passive-category income.
Under the default section 1291 PFIC regime, "excess distributions" and gains on sale are taxed at the highest ordinary rate for each year of your holding period, plus an interest charge. Critically, the US–NZ tax treaty does not exempt KiwiSaver from PFIC treatment. So you can owe real US tax on a fund that NZ has already taxed (a PIE is taxed inside the fund, capped at the 28% prescribed investor rate) — and your spare salary credits are in the wrong basket to help.
| Income | FTC basket | NZ effective rate | US tax after FTC |
|---|---|---|---|
| NZ$95,000 salary | General | ~22% (high) | $0 — fully credited |
| KiwiSaver / PIE (PFIC) | Passive | Up to 28% in-fund | Often > $0 — salary credits can't reach it |
Carryover of excess NZ credits: 1 back, 10 forward
When you can't use all your NZ credit this year, it isn't lost. Per the Form 1116 instructions, excess foreign tax credit can be carried back 1 year and carried forward 10 years. (GILTI/section 951A credits are the exception — no carryover at all.)
But here's the part most people miss: carryovers stay inside their own basket. Daniel's ~US$7,700 of excess credit is a general-basket carryover. It can only ever offset US tax on future general-category income (more salary, business profit) — never his passive PFIC tax. For high earners in NZ, general-basket carryforwards frequently expire unused after 10 years, because NZ keeps taxing your salary at a higher rate than the US every single year, so there is never a year where US general-category tax exceeds the NZ credit.
When carryovers actually get used:
- You have a low-NZ-tax year (career break, lower income) where the US tax on your salary exceeds the NZ tax — e.g. a year of NZ tax-free or low-taxed income still subject to US tax.
- You move to a lower-tax country mid-decade and have general-category US tax that your banked NZ credits can absorb.
- You generate passive-basket NZ credits (e.g. NZ withholding on dividends) that can soak up passive-basket US tax — this is the one carryover pool that can help with investment income.
The timing mismatch: NZ's April–March year vs the US Jan–Dec year
New Zealand's tax year runs 1 April to 31 March (Inland Revenue). The US tax year is the calendar year, 1 January to 31 December. They don't line up — so "the NZ tax I paid" never maps cleanly to "the US year I'm claiming it in."
Form 1116 lets you elect to claim the credit on an accrued basis instead of a paid (cash) basis. This matters a great deal in NZ:
- Paid (cash) basis: you credit NZ tax in the US year you actually paid it. With NZ's PAYE withholding through the year, that can scatter your NZ liability across two US calendar years and create artificial mismatches.
- Accrued basis: you credit NZ tax in the US year the underlying income was earned, regardless of when the cash left your hands. This typically matches NZ tax to the right US income far more cleanly.
Back to Daniel. His NZ salary tax is collected by PAYE across the NZ year (Apr–Mar). On the accrued method, he matches the NZ tax accrued on his Jan–Dec 2025 earnings to his 2025 US return, even though some of that PAYE was physically remitted in early 2026. This keeps his ~US$12,700 of NZ salary credit lined up against the right year's US salary tax, so the offset to zero is clean and his excess credit is correctly stated.
The trade-off: per Publication 514, the accrual election is essentially irreversible. Once you choose to take the credit when taxes accrue, you must use that method in all later years, it applies to all your foreign taxes (not just salary), and you cannot make the choice for the first time on an amended return. Daniel makes the election deliberately, with his accountant, knowing it's permanent.
- On a NZ$95,000 salary, NZ income tax is ~$21,228 (effective ~22.3%), comfortably more than the US tax on the same wage — so the Form 1116 general-basket credit usually zeroes your US salary tax.
- The leftover NZ credit is general-basket and cannot offset PFIC (KiwiSaver/PIE) tax, which sits in the passive basket. That's why salary credits don't rescue you from PFIC tax.
- Excess FTC carries 1 year back, 10 years forward — but only within the same basket. High NZ earners often see general-basket carryforwards expire unused.
- NZ's tax year (1 Apr–31 Mar) doesn't match the US calendar year. The accrued election on Form 1116 usually aligns NZ tax with the right US year — but it's permanent and applies to all foreign taxes.
- Figures are illustrative and FX-dependent; confirm rates and your own numbers against IRS and Inland Revenue, and get specialist NZ–US advice before filing.
Sources
- Inland Revenue — Tax rates for individuals (from 1 April 2025)
- IRS — Foreign Tax Credit (Form 1116)
- IRS — Instructions for Form 1116 (carryback/carryforward)
- IRS Publication 514 — baskets & accrual election
- IRS — Instructions for Form 8621 (PFIC reporting)
Frequently asked questions
Will the foreign tax credit really make my US tax on a NZ salary zero?
At a NZ$95,000 salary it usually does. NZ's effective income tax (~22% here) is higher than the US tax on the same wage, so the Form 1116 general-basket credit fully offsets the US salary tax and typically leaves excess credit. Your exact result depends on exchange rates, deductions and any other US-source income.
If I have leftover NZ credit, why do I still owe US tax on my KiwiSaver?
Because the credit is locked in baskets. Salary credit is "general category"; KiwiSaver/PIE income is "passive category" PFIC income. IRS rules compute the limit separately per basket, and a credit in one basket cannot offset US tax in another — so your spare salary credit can't reach the PFIC tax.
How long can I carry unused foreign tax credits?
Per the Form 1116 instructions, excess foreign tax credit carries back 1 year and forward up to 10 years — but only within the same income basket. GILTI (section 951A) credits cannot be carried over at all.
Should I claim the credit on the paid or accrued basis?
For NZ filers the accrued basis usually matches NZ tax to the correct US year, because NZ's April–March year doesn't line up with the US calendar year. But the accrual election is effectively permanent, applies to all your foreign taxes, and can't be made for the first time on an amended return — so decide deliberately with your accountant.
Does the US–NZ tax treaty exempt KiwiSaver from PFIC tax?
No. The treaty does not exempt KiwiSaver from PFIC reporting or tax. KiwiSaver and PIE funds are PFICs reported annually on Form 8621, and under the default section 1291 regime excess distributions and gains can be taxed at the highest rate plus an interest charge.
Is the ACC earner's levy a creditable foreign tax?
Generally no. The ACC earner's levy is a levy, not an income tax, so it normally is not a creditable foreign tax on Form 1116. This guide bases the credit on NZ income tax only. Confirm your situation with a NZ–US specialist.
Get the free NZ–US double-tax checklist
The 1-page Form 1116 + PFIC checklist we use with NZ-based American clients — baskets, carryovers and the accrual election in plain English.
You're on the list — we'll be in touch.