FEIE vs FTC: Which Expat Tax Strategy Saves You More Money?
- How FEIE and FTC Work: The Essential Difference
- When FEIE Saves You More Money
- When FTC Delivers Better Results
- Can You Use Both FEIE and FTC Together?
- Self-Employment Tax Factor
- Country-Specific Strategy Guide
- Common Mistakes That Cost Money
- Making Your Decision: Quick Assessment
- Professional Planning Makes the Difference
- Next Steps: Optimizing Your Expat Tax Strategy
- Ready to optimize your expat tax strategy?
Here’s the relief you’ve been looking for: According to the IRS Statistics of Income division, hundreds of thousands of Americans abroad file Form 2555 (FEIE) and Form 1116 (FTC) annually, using these two powerful tax protections to reduce or eliminate their US tax bill dramatically. The choice between the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC) can mean the difference between owing thousands or nothing.
Most expats can eliminate their entire US tax liability using one of these strategies. The key is choosing the right one for your specific situation. In most cases, you’ll either exclude up to $130,000 of foreign income from US taxation (2025 tax year) or claim a dollar-for-dollar credit for foreign taxes you’ve already paid.
The bottom line: Expats in low-tax countries typically save more with FEIE, while those in high-tax countries often benefit more from FTC. Some situations allow you to use both strategies together for maximum savings.
How FEIE and FTC Work: The Essential Difference
The Foreign Earned Income Exclusion and Foreign Tax Credit attack your US tax bill from entirely different angles.
FEIE removes income from taxation entirely. You exclude up to $130,000 of foreign earned income (2025 tax year) from your US tax return, as if you never earned it. This means you pay $0 in US taxes on excluded income, regardless of your US tax bracket.
FTC reduces your tax bill dollar-for-dollar. You pay foreign taxes first, then claim those payments as credits to offset your US tax liability. If you paid $5,000 in foreign taxes, you get a $5,000 credit against your US taxes.
Think of it this way: FEIE shrinks your taxable income, while FTC shrinks your final tax bill.
When FEIE Saves You More Money
FEIE typically works best for expats living in countries with lower tax rates than the US.
Perfect FEIE candidates:
- Digital nomads in Southeast Asia or Eastern Europe
- Expats in Gulf countries with no income tax (UAE, Saudi Arabia, Qatar)
- Remote workers in lower-tax countries like Portugal, Panama, or Costa Rica
- Anyone earning under $130,000 who pays minimal foreign taxes
Real example: Sarah works remotely from Portugal, earning $95,000 annually. Portugal taxes her at 15%, so she pays about $14,250 in Portuguese taxes. Using FEIE, she excludes her entire $95,000 from US taxation, owing $0 to the IRS. Using the FTC, she’d owe roughly $7,000 to the US after claiming her $14,250 foreign tax credit.
FEIE also eliminates the complexity of foreign tax calculations and carryovers. You exclude your income and move on.
Who doesn’t love a tax break? Download our easy-to-use excel calculator to get an estimate of how the foreign earned income exclusion can save you money.
When FTC Delivers Better Results
The Foreign Tax Credit shines when you pay higher foreign tax rates than in the US.
Ideal FTC situations:
- Expats in European countries with 25 %+ tax rates
- High earners in countries like Germany, France, or Scandinavia
- Anyone whose foreign tax rate exceeds their US effective tax rate
- Situations where foreign taxes exceed what you’d owe the US
Real example: Mark lives in Germany and earns $120,000 annually. Germany taxes him at 35%, so he pays $42,000 in German taxes. His US tax liability would be approximately $18,000. Using FTC, he credits his $42,000 in German taxes against his US bill, owing $0 to the IRS with $24,000 in excess credits to carry forward.
FTC also captures taxes paid on investment income, rental income, and other non-earned income that FEIE can’t touch.
Can You Use Both FEIE and FTC Together?
Yes, but with important limitations that require strategic planning. You can combine FEIE and FTC on the same tax return, but NOT on the same income. Here’s how it works:
Common combination scenarios:
- Use FEIE for earned income, FTC for investment/rental income
- Exclude part of your earned income with FEIE, and use FTC for the remainder
- Apply FEIE for foreign income, FTC for foreign taxes on US-source income
Strategic example: Lisa earns $180,000 working in Singapore (0% tax rate) plus $30,000 from a German rental property (taxed at 25%). She uses FEIE to exclude $130,000 of her Singapore income and FTC to offset the $7,500 in German taxes against US taxes owed on her remaining $50,000 Singapore income plus rental income.
Critical limitation: If you use FEIE for any earned income, you cannot claim FTC for foreign taxes paid on that same excluded income. This restriction often makes combining strategies less beneficial than choosing one or the other.
Self-Employment Tax Factor
Here’s where FEIE has a significant limitation that affects many expats: FEIE does not reduce self-employment tax.
If you’re self-employed abroad, you’ll still owe 15.3% self-employment tax on your entire foreign income, even if you exclude it from income tax using FEIE. This can add up to nearly $20,000 on the maximum exclusion amount.
Self-employment considerations:
- FEIE: Excludes income from income tax but not self-employment tax
- FTC: Can potentially offset both income and self-employment tax (through complex calculations)
- Business structure: Consider incorporating to potentially reduce self-employment tax exposure
High-earning self-employed expats in moderate-tax countries often benefit more from FTC despite paying some foreign taxes, because FTC can help offset both types of taxes.
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Country-Specific Strategy Guide
Your tax strategy should align with your host country’s tax system.
Low-tax countries (0-15% rates): FEIE typically wins
- UAE, Qatar, Singapore, Hong Kong
- Portugal (NHR program), Malta, Cyprus
- Some Eastern European countries
Moderate-tax countries (15-25% rates): Depends on income level
- Spain, Italy, Netherlands
- Canada, Australia, New Zealand
- Consider income splitting between FEIE and FTC
High-tax countries (25 %+ rates): FTC is usually optimal
- Germany, Austria, Belgium, France
- Scandinavian countries
- Some provinces in Canada
No foreign tax countries: FEIE is your only option
- Countries where you pay zero foreign income tax
- Be aware of potential US tax liability on income over $130,000
Common Mistakes That Cost Money
Mistake 1: Using FEIE in high-tax countries. Many expats automatically choose FEIE without calculating FTC benefits. In countries like Germany or France, the FTC often eliminates more tax liability.
Mistake 2: Not considering the housing exclusion, FEIE users can also claim the foreign housing exclusion for qualifying expenses, potentially excluding another $20,000+ from US taxation.
Mistake 3: Mixing strategies incorrectly. Combining FEIE and FTC requires careful planning. Incorrect combinations can trigger recapture rules and unexpected tax bills.
Mistake 4: Ignoring state tax implications. Some US states don’t recognize FEIE, making FTC more valuable for maintaining state tax residency ties.
Mistake 5: Not planning for high-income years, FEIE caps at $130,000, so high earners need additional strategies. FTC scales with your income and foreign taxes paid.
Making Your Decision: Quick Assessment
Choose FEIE if:
- You live in a low-tax country (under 15% rate)
- Your foreign income is under $130,000 in 2025
- You want simplicity in tax preparation
- You’re not self-employed or have minimal self-employment income
- You pay significantly less in foreign taxes than you would owe the US
Choose FTC if:
- You live in a high-tax country (over 25% rate)
- Your foreign income exceeds $130,000 in 2025
- You have significant investment or rental income
- You’re self-employed with substantial income
- Your foreign tax rate exceeds your US effective tax rate
Consider combining both if:
- You have multiple income sources
- Your foreign income significantly exceeds $130,000 in 2025
- You have both earned and investment income
- You split time between high and low-tax countries
Professional Planning Makes the Difference
The choice between FEIE and FTC isn’t always straightforward. Currency fluctuations, changing income levels, and evolving tax laws can shift the optimal strategy from year to year.
Greenback is an American company founded in 2009 by US expats for expats. We’ve focused exclusively on expat taxes and always have. Many of our CPAs and Enrolled Agents are expats themselves, and because they live in 14 time zones, they experience firsthand the challenges of living abroad. They have the knowledge and patience to help you determine the optimal strategy for your unique situation.
We’ve helped over 23,000 expats file over 71,000 returns while maintaining a 4.9-star average on TrustPilot. Our comprehensive expertise means we don’t just calculate your current year tax—we help you plan a multi-year strategy that maximizes your savings while keeping you compliant.
Next Steps: Optimizing Your Expat Tax Strategy
The optimal choice between FEIE and FTC depends on your specific circumstances, and those circumstances can change over time. Here’s how to move forward:
For current tax year planning:
- Calculate your potential tax savings under both scenarios
- Consider your self-employment tax exposure
- Factor in any housing exclusion benefits
- Review your multi-year income projections
For long-term optimization:
- Plan for income fluctuations and career changes
- Consider the impact of moving between countries
- Account for changing family situations and filing status
- Build flexibility into your expat tax strategy
You’ll have peace of mind, knowing that your taxes were done right and your strategy optimized for both current savings and future planning.
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.
This article provides general information about expat tax strategies. Tax situations vary significantly, and professional guidance is recommended for optimal planning. Consult with a qualified expat tax professional to determine the best strategy for your specific circumstances.
