Choosing Between the FEIE or FTC for US Expats

If you’re a US expat earning income abroad and you meet a minimum filing threshold, you’ll likely need to file taxes both in your country of residence and in the US. Which could be a bit of a pain, to say the least! Thankfully, the IRS provides a number of tax benefits that can reduce or eliminate double taxation. Two of the most beneficial are the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). Both are designed to help you avoid double taxation—but they work in very different ways. Choosing between the FEIE or FTC (or whether to combine them) can have a big impact on how much tax you owe. You also need to consider the limitations on switching from the FEIE to the FTC when planning your tax approach.

If you want to optimize your tax strategy, understanding both benefits is crucial.

Let’s break down the FEIE and FTC in simple terms.

What is the Foreign Earned Income Exclusion (FEIE)?

The Foreign Earned Income Exclusion allows you to exclude $126,500 of foreign earned income from your US tax liability.

Benefits of the FEIE

• Simple to apply (file IRS Form 2555 along with your federal tax return).
• Can be used for all types of foreign-earned income (such as salary, wages, professional fees, self-employment income).

Limitations of the FEIE

• Only earned income is eligible (passive income, such as pensions, interest, dividends, and rental income does not qualify).
• It can’t be applied to income for personal services provided to a corporation that represents a distribution of earnings and profits rather than reasonable compensation.
• Reduces your adjusted gross income (AGI), which can impact eligibility for other tax benefits.
• It doesn’t reduce self-employment tax.

Do I Qualify for the FEIE?

To qualify for the FEIE, you’ll need to have a tax home in a foreign country and meet either the Bona Fide Residence Test—being a resident of a foreign country for an entire tax year—or the Physical Presence Test—being physically present in a foreign country for at least 330 full days during any 12-month period.

Read More: IRS Foreign Earned Income Exclusion

Foreign Housing Exclusion

If you earn over the FEIE limit ($126,500), you may be eligible for the Foreign Housing Exclusion. This benefit can be applied if your qualified housing costs (such as rent, repairs and insurance) exceed the threshold ($20,240). You can apply for the Foreign Housing Exclusion along with the FEIE on Form 2555.

What Is the Foreign Tax Credit (FTC)?

The Foreign Tax Credit (FTC) lets you offset your US tax bill with income taxes you paid to a foreign country. There’s no income cap, and it applies to both earned and unearned income.

Benefits of FTC:

• No limit to the amount of foreign tax that can be credited.
• Applies to both earned and passive income.
• No residency or physical presence requirements.
• If you paid more in foreign taxes than your US tax liability, you can apply the unused credit to the previous year or carry it forward up to 10 years from when it was originally claimed.

Limitations of the FTC

• You can’t claim more than your US tax liability (the credit is non-refundable).
• You can only claim foreign income taxes within the same income bucket. For example, income types like rental, investment income and capital gains are generally in the passive bucket, which means you won’t be able to claim income taxes paid on your foreign salary against this income.
• You can’t claim the credit if you live in a country that the US considers state sponsors of terrorism (Cuba, Syria, North Korea, or Iran).

How to Claim the FTC

You can claim the FTC with IRS Form 1116. This is one of the IRS’s more laborious forms, which involves several calculations. For full details of how to calculate and claim the FTC, see our breakdown: What US Expats Need to Know About the Foreign Tax Credit.

Choosing Between the FEIE or FTC

So how do you decide between FEIE or FTC? Three critical factors are your income type, the tax rate in your country of residence, and your total income.

FEIE is often better if:

• You live in a low-tax or no-tax country (like the Saudi Arabia or Singapore).
• Your total foreign earned income is under the exclusion cap.

FTC is often better if:

• You pay foreign income taxes, especially at higher rates than the US (like in Denmark or Canada).
• You earn passive income that’s not eligible for FEIE.
• You will have excess credits that you want to carry over.

Do I Have to Choose Between the FTC or FEIE?

The good news is that you can use the FTC and FEIE together. You can use FEIE for part of your income, and FTC for the rest.

For example, if you earn $150,000 abroad:

• You can exclude $126,500 with FEIE (2024).
• The remaining $23,500 is still taxable in the US, but you can offset it with the FTC for foreign tax paid.

And remember that the Foreign Housing Exclusion can further reduce your US liability.

What to Watch Out For When Choosing Between the FEIE or FTC

It probably goes without saying that you can’t use the FTC for income you already excluded with FEIE.

What is less obvious, is that if you switch from the FEIE to the Foreign Tax Credit, you can’t claim the FEIE for five years without IRS approval. Requesting a ruling to be able to use the Exclusion again can be complex and involves IRS fees. Planning your approach in advance can help you reduce your US liability and avoid costly filing errors. For a personalized recommendation from our Tax Professionals on your optimal strategy, see our FTC / FEIE Calculator.

Filing US Taxes Can Be Simple

No matter where life takes you, MyExpatTaxes makes US expat taxes simple. With affordable packages and fast e-filing in under 30 minutes, we remove the guesswork and paperwork. Most importantly, our software automatically applies the best tax benefits for your situation—whether that’s the Foreign Earned Income Exclusion, Foreign Tax Credit, or both—along with every other deduction and credit you’re entitled to. Our experts ensure you never pay a cent more in taxes than absolutely necessary. Join the thousands of expats who trust MyExpatTaxes and file today!

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