The IRS, via Form 1116, applies a portion of your deductions to your foreign income, and then uses the result to calculate what per cent of your taxable income and taxes are attributable to the foreign income in that category (passive for dividends). The result is the maximum you are allowed to claim this year, which often results in unused foreign taxes which may be carried forward 10 years. However, you may have made an error on the form. Check carefully whether too many deductions were applied to the foreign income. Also, for investment income, the IRS via Form 1116 bases the foreign income's share of deductions on the cost basis of the investments generating the income vs your overall investment cost basis. That ratio will affect the % of investment deductions applied to the foreign income - the lower the ratio the better. In summary: the maximum you can deduct is calculated in Form 1116 - so check that form carefully. Last year, if your total foreign tax was $300 ($600 if joint return), you paid all through a 1099, and you had only passive income, you will not have filed Form 1116 and you had no limit on deductions.
