Comparing FEIE and Foreign Tax Credit for Expats

The Foreign Earned Income Exclusion and Foreign Tax Credit are two paths to avoid double taxation, and the right choice depends on your country's tax rate, income level, and multi-year planning. Revoking an FEIE election carries permanent consequences.

You cannot use both on the same income. The FEIE (Form 2555) excludes up to $126,500 (2024) of foreign earned income from your US taxable income. The FTC (Form 1116) lets you credit foreign taxes paid against your US tax liability. If you claim the FEIE on income, you cannot also claim the FTC on taxes paid on that same excluded income. You can, however, use the FEIE on earned income and the FTC on other income types (such as investment income) in the same year.

The FEIE is simpler but often less valuable. The exclusion works well in low-tax countries where you pay little foreign income tax. In high-tax countries -- where your foreign tax rate exceeds your US effective rate -- the FTC usually saves more because it provides a dollar-for-dollar credit against US tax. Excess FTC credits carry forward for 10 years, creating future tax savings the FEIE cannot match.

The FEIE does not reduce self-employment tax. If you have self-employment income, the FEIE only excludes it from income tax. You still owe the 15.3% self-employment tax on the full amount. The FTC does not directly offset SE tax either, but using the FTC instead of the FEIE can produce a lower overall combined liability in many scenarios.

The pitfall: Revoking a FEIE election has consequences. Once you revoke, you generally cannot re-elect the FEIE for five years without IRS approval. A CPA models both scenarios across multiple years before making the election.