Foreign Earned Income Exclusion vs Foreign Tax Credit: Which one should you use?

If you're a US expat earning income abroad, you face a critical question: should you use the Foreign Tax Credit (FTC), the Foreign Earned Income Exclusion (FEIE), or both?

The wrong choice can cost you thousands in unnecessary taxes or missed refund opportunities.

Quick answer: The FTC usually works best in high-tax countries such as Germany, France, or the UK because it lets you claim dollar-for-dollar credits for foreign taxes paid. The FEIE often makes more sense in low-tax or no-tax jurisdictions like the UAE, Saudi Arabia, or certain Caribbean countries, where little or no foreign income tax is due.

Many expats use both strategically, applying FEIE to earned income up to the limit and FTC to income above the cap or to non-earned income.

Understanding the difference between the foreign tax credit and the foreign earned income exclusion is essential for minimizing your US tax burden while staying compliant. The two approaches work in very different ways.

FEIE removes qualifying earned income from your US tax return entirely, up to $132,900 for 2026. FTC, on the other hand, keeps your income on the return but reduces your US tax bill by offsetting it with credits for taxes already paid abroad.

Neither option is automatically better. The right choice depends on where you live, how much you earn, and how much tax you pay overseas. Some expats save the most by excluding income with FEIE, while others benefit more from FTC. High earners often combine both strategies to reduce overall tax.

FTC vs. FEIE: Understanding the difference between Foreign Tax Credit and Foreign Earned Income Exclusion

The foreign tax credit vs foreign earned income exclusion debate isn't just academic. These two strategies take completely different approaches to reducing your US tax bill, and choosing wrong can cost you real money.

When comparing FTC vs FEIE, it's critical to understand how each mechanism works and which situations favor one over the other.

 

Choose FTC when:

• You're paying foreign taxes at rates similar to or higher than US rates
• Your income exceeds the FEIE cap and you need relief on the excess
• You want to preserve eligibility for the Child Tax Credit or Additional Child Tax Credit
• You have passive income like dividends, interest, or rental income from foreign sources
• You want flexibility to carry unused credits to other tax years

Choose FEIE when:

• You're in a low-tax or zero-tax country
• Your earned income stays comfortably under $132,900
• You want straightforward filing with predictable results
• You don't have much passive income
• You're not worried about qualifying for refundable credits

What is the Foreign Tax Credit (FTC)?

The Foreign Tax Credit lets you offset your US tax liability dollar-for-dollar with foreign income taxes you've paid or accrued to a foreign country or US possession. Think of it as a coupon that reduces your US tax bill based on taxes you've already paid abroad.

What the FTC does:

• Provides a credit against US tax for foreign income taxes paid on foreign-source income
• Applies to earned income (wages, self-employment) and passive income (dividends, interest, royalties, capital gains)
• Can be carried back one year or forward ten years if you can't use the full credit in the current year

What FTC doesn't do:

• Doesn't apply to foreign value-added taxes (VAT), sales taxes, or property taxes (only income taxes qualify)
• Doesn't reduce self-employment tax (you still owe SE tax on net self-employment income)
• Is limited to the US tax on your foreign-source income (you can't use foreign taxes to offset US tax on US-source income)

You'll typically file Form 1116 to claim the FTC. However, you can skip Form 1116 if you meet all these conditions: your foreign tax is $300 or less ($600 if married filing jointly), all your foreign income is passive income (interest, dividends, etc.), and you elect to claim the credit based on payee statements like Form 1099-DIV or 1099-INT.

This simplified method works only for smaller amounts of passive income.

How to qualify for the FTC

The Foreign Tax Credit (FTC) has straightforward qualification rules, but you must meet all conditions carefully. To claim the credit, you must pay or accrue foreign income tax to a qualifying foreign country or US possession.

The tax must be a legal and actual liability, not a voluntary payment. It also must be based on income or profits, not on gross receipts or other types of taxes.

You need to report the foreign-source income on your US tax return. Other factors, such as your filing status and whether the income is earned or passive, can affect eligibility.

For complete details, refer to IRS Publication 514.

Carryover provision

One powerful feature of the Foreign Tax Credit (FTC) is the carryover provision. If your foreign tax credit exceeds your US tax liability in a given year, you don’t lose the excess. You can carry unused credits back one year or forward ten years, applying them when you have enough US tax liability to use them.

The IRS separates credits into categories or baskets, such as active business income or passive investment income, and you can only apply credits from each basket to the same type of income.

Missed the Foreign Tax Credit on a past return? You may still be able to claim it!

If you didn’t claim the Foreign Tax Credit when you filed your taxes, you can correct it by submitting an amended return. The IRS allows you to file an amendment within three years from the original filing date OR within two years from the date you paid the tax, whichever is later.

What you need to amend:

• Form 1040-X (Amended US Individual Income Tax Return)
• Corrected or new Form 1116 calculating your foreign tax credit
• Supporting documentation, such as foreign tax returns, proof of payment, or tax certificates
• Any other corrected schedules affected by the amendment

For help identifying which forms to file, see our US tax forms for expats guide.

What is the Foreign Earned Income Exclusion (FEIE)?

The Foreign Earned Income Exclusion (FEIE) allows qualifying US expats to exclude up to $132,900 (tax year 2026) of foreign earned income from US taxable income. If both spouses qualify, they can exclude up to $265,800 combined (2 × $132,900).

Unlike the FTC, the FEIE doesn’t require paying any foreign tax. It applies only to earned income (wages, salaries, self-employment income) and not to passive income like interest, dividends, or rental income. FEIE excludes income from your US income tax base but does not reduce self-employment tax, and housing costs can stack on top of it.

You claim the exclusion by filing Form 2555 with your US tax return.

How to qualify for the FEIE

To claim the FEIE, you must meet several requirements. Here's a compact eligibility checklist:

Quick reference: FEIE, Housing, FTC & Treaty

Physical Presence Test vs. Bona Fide Residence Test

Both tests allow you to qualify for the FEIE, but they work differently.

Physical Presence Test

You must be physically present in foreign countries for at least 330 full days in any 12-month period. It counts only time abroad.

Example – Digital nomad:
Sarah travels frequently as a freelancer. In 2026, she spends 340 days outside the US. She tracks her days with passport stamps and flight records. Meeting the 330-day threshold, she qualifies and can exclude up to $132,900 of her income.

Bona Fide Residence Test

You must be a tax resident of a foreign country for a full tax year and show intent for long-term residence.

Example – Family abroad:
James moves to Singapore with his family for work. He rents a home, enrolls his children in school, and becomes a Singapore tax resident. Maintaining no permanent home in the US, he qualifies for the FEIE for the full year without counting days abroad.

Can I take Foreign Income Exclusion and Foreign Tax Credit?

Yes, many expats combine the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC), known as "stacking." This strategy helps high earners or those with mixed income types minimize US taxes while staying fully compliant with IRS rules.

Important warning: You cannot double-dip by using the same income or foreign taxes for both benefits. Apply FEIE first, then claim FTC only on the remaining taxable income with foreign taxes paid on that portion.

Example – Income over FEIE cap (2026):

You earned $180,000 in wages abroad, paying $54,000 in foreign income tax. Use FEIE to exclude the first $132,900, leaving $47,100 taxable in the US. Allocate foreign taxes proportionally ($14,130) and claim that amount on Form 1116. US tax owed on the remaining income may be minimal or zero.

Example – Mixed earned + passive income:

You earn a $100,000 salary abroad (paid $22,000 foreign tax) plus $30,000 US dividends. FEIE excludes the salary, so no FTC applies to it. Any foreign taxes on passive income (if paid) could still be claimed via FTC, but US dividends remain fully taxable. This approach ensures you maximize tax benefits while avoiding IRS scrutiny.

How to choose between FTC vs. FEIE

Choosing between FEIE vs FTC (or deciding to use both) depends on your specific tax situation. Here's a decision framework with scenarios to help you choose.

Choose FTC when:

• You live in a high-tax country where your foreign tax rate equals or exceeds US rates
• You earn significantly above the FEIE cap and need to offset US tax on the excess
• You want to claim the Child Tax Credit, Additional Child Tax Credit, or American Opportunity Tax Credit (FEIE can reduce your income too much to qualify)
• You have substantial passive income from foreign sources
• You expect variable income year-to-year and want flexibility to carry credits forward

Choose FEIE when:

• You live in a low-tax or zero-tax jurisdiction
• Your earned income is comfortably under the $132,900 cap
• You want predictable tax results without complex calculations
• You have minimal or no passive income
• You're not claiming refundable US tax credits

Scenario 1 (High-tax country, income over cap):

Elena works in France, earning €180,000 (approximately $195,000 USD) and pays about $70,000 in French income taxes. Her best strategy is to use FEIE to exclude the first $132,900, leaving $62,100 taxable.

She then claims the FTC for the French taxes paid on that $62,100 (roughly $23,400 of her total French tax), which more than covers her US tax liability. She owes little to no US tax.

Scenario 2 (Low-tax country, income under cap):

Marcus works in Dubai earning $110,000 with zero UAE income tax. His optimal strategy is FEIE only. He excludes the entire $110,000, has zero taxable income, and pays no US tax. Since he paid no foreign tax, FTC wouldn't help him.

Scenario 3 (High income, claiming Child Tax Credit):

Sophie lives in Canada, earns $150,000, and has two young children. If she uses only FEIE, she'd exclude $132,900, leaving $17,100 taxable income (likely too low to claim the full $2,000 per child Child Tax Credit). Instead, she uses only the FTC, claiming the credit for all Canadian taxes paid.

This keeps her US taxable income at $150,000, ensuring she qualifies for the full Child Tax Credit, and the FTC eliminates most of her US tax anyway. The Child Tax Credit could save her an additional $4,000, making FTC-only the better choice.

FEIE & FTC forms overview

Not sure which tax break fits you best? Get expert advice

Choosing between the foreign tax credit and the foreign earned income exclusion isn’t always straightforward. It depends on many factors, including your income level, the type of income you earn, and your tax residency.

The year you move abroad or return to the US can be especially complex. It often includes income earned both inside and outside the States, which may affect your eligibility for each provision.

If you have multiple sources of earned or passive income across countries, choosing the right strategy could significantly reduce your US tax bill.

At Taxes for Expats, we’ll walk you through your options and recommend the best one to lower your tax liability – wherever you live.

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