Choosing Between the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC)
Living as a U.S. expat presents a unique set of financial challenges, none more pressing than the requirement to file U.S. taxes, regardless of where you reside. Fortunately, the IRS provides two primary mechanisms to prevent double taxation: the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC).
Deciding between these two is one of the most critical tax choices you will make. While the IRS reports approximately 62% of Americans abroad owe $0 in federal taxes after applying these benefits, the “wrong” choice can cost you thousands in lost credits or unnecessary tax bills.
Not Sure Whether FEIE or FTC Is Better for You?
What is the Foreign Earned Income Exclusion (FEIE)?
The FEIE allows you to “exclude” a set amount of your foreign earnings from your U.S. taxable income. For the 2025 tax year (filing in 2026), you can exclude up to $130,000.
- Requirements: You must pass either the Physical Presence Test (330 full days outside the U.S. in a 12-month period) or the Bona Fide Residence Test (being a resident of a foreign country for an entire uninterrupted tax year).
- Eligible Income: Only “earned” income qualifies, such as wages, salaries, and self-employment income.
- Forms: Filed using IRS Form 2555.
What is the Foreign Tax Credit (FTC)?
The FTC is a dollar-for-dollar credit against your U.S. tax bill for income taxes you have already paid to a foreign government.
- Requirements: There are no residency or physical presence tests; you must have paid or accrued a legal tax obligation to a foreign country.
- Eligible Income: Unlike the FEIE, the FTC can be applied to both earned income and passive income, such as dividends, interest, and rental income.
- Forms: Filed using IRS Form 1116.
FEIE vs. FTC: A Quick Comparison
| Feature | Foreign Earned Income Exclusion (FEIE) | Foreign Tax Credit (FTC) |
| Primary Benefit | Removes up to $130,000 from taxable income | Dollar-for-dollar credit against U.S. tax owed |
| Income Type | Earned income only (wages, self-employment) | Earned and passive income (rent, dividends) |
| Best For | Low-tax or tax-free countries (e.g., UAE, Panama) | High-tax countries (e.g., UK, Germany, Canada) |
| Residency Test | Requires meeting PPT or BFR tests | No residency test required |
| Child Tax Credit | May limit your ability to claim refundable credits | Allows you to claim the refundable Child Tax Credit |
| Carryover | None; it’s “use it or lose it” each year | Unused credits can be carried forward up to 10 years |
Which Strategy Should You Choose?
Choose FEIE if:
- You live in a country with little to no income tax.
- You want a simple way to reduce your Adjusted Gross Income (AGI), which can help qualify for certain deductions or manage student loan repayments.
Choose FTC if:
- You live in a high-tax country where your local tax rate is higher than the U.S. rate.
- You have children and want to claim the Additional Child Tax Credit.
- You want to contribute to a U.S. IRA (you need “taxable” earned income to contribute, which the FEIE removes).
Can I Use Both?
Yes, but you cannot “double dip”. You cannot use the FTC on the same dollar of income that you have already excluded with the FEIE. However, many expats use the FEIE for their salary and the FTC for their passive investment income or for any earnings that exceed the $130,000 exclusion limit.
Ready to Optimize Your Expat Tax Strategy?
If you’re ready to be matched with a Greenback accountant who can analyze your specific situation and recommend the best approach, click the get started button below. For general questions about FEIE vs FTC or working with Greenback, contact our Customer Champions.
Stop Guessing Between FEIE and FTC.
Tax rules for expats are complex and subject to change. This guide is for informational purposes for the 2026 filing season and does not constitute professional tax advice.
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