Use FEIE in low-tax countries (exclude up to $126,500 of earned income). Use FTC in high-tax countries (credit foreign taxes paid, often exceeding FEIE benefit). You can use both: FEIE for earned income up to limit, FTC for taxes on excess earnings and investment income. Choice depends on foreign tax rate vs US rate.
At a glance
Key Facts
FEIE 2024 Limit
$126,500 earned income exclusion
FTC Principle
Dollar-for-dollar credit for foreign taxes paid
Low-Tax Countries
FEIE usually better (UAE, Singapore, Hong Kong)
High-Tax Countries
FTC usually better (UK, Germany, France)
Investment Income
FTC only—FEIE doesn't apply
Introduction
US expats have two main tools to avoid double taxation: the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). Choosing correctly can save thousands—or cost thousands if you get it wrong.
This guide compares both options with real calculations to help you decide.
Section 01
How Each Works
Foreign Earned Income Exclusion (FEIE)
What it does: Excludes foreign earned income from US taxation
2024 limit: $126,500 (indexed annually)
Qualifying income: Wages, self-employment (NOT investment)
Requirements: Tax home abroad + Physical Presence or Bona Fide Residence test
Form: 2555
Foreign Tax Credit (FTC)
What it does: Credits foreign taxes paid against US tax liability
Limit: Cannot exceed US tax on foreign income
Qualifying taxes: Income taxes paid to foreign governments
Carryover: Excess credits carry forward 10 years, back 1 year
Form: 1116
Key Differences
Factor
FEIE
FTC
Mechanism
Excludes income
Credits tax paid
Limit
$126,500
US tax on foreign income
Investment income
No
Yes
Excess foreign tax
N/A
Carries forward
Social Security tax
Still owed (SE)
Still owed (SE)
Section 02
When to Use FEIE
Best for Low-Tax Countries
FEIE shines when foreign tax is lower than US tax:
UAE: 0% income tax
Singapore: 0-24% (lower than US for most)
Hong Kong: 2-17%
Panama: 0% on foreign income
Georgia: 1% for IT freelancers
Example: $100,000 Income in UAE
Without FEIE:
US tax on $100,000: ~$17,500
Foreign tax paid: $0
FTC benefit: $0
Total tax: $17,500
With FEIE:
Excluded: $100,000
US taxable: $0
Total tax: $0
FEIE saves: $17,500
FEIE + Housing Exclusion
Additional exclusion for housing costs exceeding base (~$19,000):
Dubai housing $40,000/year
Exclusion: $40,000 - $19,000 = $21,000
Total FEIE + Housing: $126,500 + $21,000 = $147,500
Section 03
When to Use FTC
Best for High-Tax Countries
FTC shines when foreign tax exceeds US tax:
UK: 20-45%
Germany: 14-45% + solidarity
France: 0-45%
Denmark: Up to 52%
Sweden: Up to 52%
Example: $100,000 Income in UK
With FEIE:
UK tax paid: ~$28,000
FEIE excludes from US: $100,000
US tax owed: $0
Total tax paid: $28,000 (to UK)
With FTC:
UK tax paid: ~$28,000
US tax on $100,000: ~$17,500
FTC: $17,500 (limited to US tax)
Excess credit: $10,500 (carries forward)
Total tax paid: $28,000 (to UK)
Both result in same total tax—but FTC creates excess credit carryforward useful if you later earn investment income or move to low-tax country.
Example: $150,000 Income in UK
With FEIE:
Excluded: $126,500
US taxable: $23,500 (at top rates ~24%)
US tax on excess: ~$5,640
UK tax: ~$45,000
Total: $50,640
With FTC:
UK tax: ~$45,000
US tax: ~$30,000
FTC: $30,000
Excess credit: $15,000 carryforward
Total: $45,000
FTC saves: $5,640
Section 04
Using Both Together
Strategic Combination
You can use FEIE for earned income and FTC for:
Taxes on income above FEIE limit
Taxes on investment income (dividends, capital gains)
Taxes on rental income
Example: $200,000 Earned + $50,000 Investment in Germany
FEIE + FTC Strategy:
FEIE: Exclude $126,500 earned income
Remaining earned: $73,500 taxable in US
German tax on $73,500: ~$31,000
US tax on $73,500: ~$20,000
FTC on earned excess: $20,000 (creates $11,000 excess)
Investment income: $50,000 (no FEIE)
German tax on investment: ~$13,000
US tax on investment: ~$10,000
FTC on investment: $10,000
Result: Pay German tax only ($44,000 total), excess credits carry forward.
Important: FEIE Ordering Rules
When you use FEIE, your remaining income is taxed at rates as if you hadn't excluded anything ("stacking"). The $73,500 above is taxed starting at higher brackets.
Section 05
Decision Framework
Quick Decision Matrix
Situation
Best Choice
Foreign tax rate < US rate
FEIE
Foreign tax rate > US rate
FTC (build credits)
0% foreign tax
FEIE (essential)
Investment income present
FTC on investment
Income over $126,500
FEIE + FTC combination
Self-employed
Either (still owe SE tax)
Planning to return to US
FTC (credits useful later)
Country-Specific Recommendations
Country
Typical Choice
Why
UAE
FEIE
0% local tax
Singapore
FEIE
Low rates
UK
FTC
Higher rates, build credits
Germany
FTC
High rates + solidarity
France
FTC
High rates
Portugal
Depends
20% NHR was FEIE, standard rates FTC
Spain
FTC
High rates (even Beckham)
Georgia
FEIE
1% IT regime
Section 06
Common Mistakes to Avoid
Mistake 1: Using FEIE in High-Tax Country
If foreign tax exceeds US tax anyway, FEIE wastes the opportunity to build FTC carryforwards. Those credits could offset US tax on investment income or after returning to US.
Mistake 2: Forgetting SE Tax
Neither FEIE nor FTC eliminates self-employment tax (15.3%). Self-employed abroad still owe SECA unless:
Country has totalization agreement with US
You pay into that country's social system
Certificate of coverage obtained
Mistake 3: Revoking FEIE Carelessly
Once you revoke FEIE, you cannot re-elect for 5 years without IRS approval. Consider carefully before switching from FEIE to FTC-only.
Mistake 4: Missing Physical Presence Test
For FEIE, you need 330 days abroad in a 12-month period. Days in US count against you. Track carefully—losing FEIE qualification is expensive.
Mistake 5: Not Filing Form 2555 on Time
First-time FEIE election must be timely filed (with extension is OK). Late filing for initial election may forfeit FEIE for that year.
Choosing between the Foreign Earned Income Exclusion and Foreign Tax Credit is one of the most important decisions a US expat makes — and the wrong choice can cost thousands. Greenback's expat CPAs analyse your specific situation and file optimally.
⚠ Not the cheapest option — best for complex situations and expats who want a dedicated CPA.
Yes, but not on the same income. Use FEIE to exclude up to $126,500 of earned income, then use FTC for: taxes on earned income above the limit, taxes on investment income, and taxes on other income types (rental, etc.). Strategic combination often yields best results.
Q
Which is better for someone earning $80,000 in UAE?
FEIE is essential. UAE has 0% income tax, so FTC provides no benefit (no foreign tax to credit). Without FEIE, you'd owe ~$13,000 US tax. With FEIE, you owe $0. For low/no-tax countries, FEIE is always the right choice.
Q
Which is better for someone earning $150,000 in UK?
FTC is likely better. UK tax on $150K is ~$45,000 while US tax is ~$30,000. Using FTC, you pay UK tax and credit it against US tax, creating $15,000 excess credits. Using FEIE, you'd exclude $126,500 but still owe US tax on $23,500 at high rates—worse outcome.
Q
Does FEIE eliminate Social Security tax?
No. Self-employed expats still owe 15.3% self-employment tax on net earnings, even with FEIE. The only way to avoid this is through a totalization agreement—if you pay into the foreign country's social system and have proper documentation (Certificate of Coverage).
Q
What happens if I switch from FEIE to FTC?
You can switch, but revoking FEIE has consequences. Once revoked, you cannot re-elect FEIE for 5 years without IRS approval. This matters if you might move to a low-tax country later. Consider your long-term plans before switching.
Disclaimer:FEIE and FTC calculations depend on individual circumstances, income types, and foreign tax rules. This guide provides general 2026 information. Tax planning for expats is complex—consult a qualified US tax professional (CPA or EA) experienced in international taxation.