For U.S. expats earning income abroad, tax season can get complicated. Even while living in a different country, American citizens and green card holders are still responsible for filing U.S. tax returns. Fortunately, the IRS offers two major tools to help reduce double taxation: the Foreign Tax Credit (FTC) and the Foreign Earned Income Exclusion (FEIE).
But which option is better?
This guide compares the Foreign Tax Credit vs. the Foreign Earned Income Exclusion, breaking down eligibility, benefits, and scenarios where one outshines the other. With the right strategy—and help from the experts at Dimov Tax—you can stay compliant and minimize your U.S. tax burden while living abroad.
What Is the Foreign Tax Credit?
The Foreign Tax Credit allows U.S. taxpayers to offset income taxes paid to a foreign country against their U.S. tax liability.
Here’s how it works:
- Dollar-for-dollar reduction: For every dollar you pay in eligible foreign taxes, you reduce your U.S. tax bill by one dollar.
- Filed using Form 1116: You must report the credit and attach supporting documentation.
- Great for high-tax countries: If you’re living in a country with similar or higher tax rates than the U.S., this method is often ideal.
Pros of the Foreign Tax Credit:
- Reduces or eliminates double taxation
- Works with passive and earned income
- Unused credits can carry forward (up to 10 years)
Cons:
- Requires more complex filing and foreign tax documents
- Limited benefit in countries with low tax rates
What Is the Foreign Earned Income Exclusion?
The Foreign Earned Income Exclusion (FEIE) allows you to exclude a portion of your foreign-earned income from U.S. taxation—up to $120,000 (as of 2023), adjusted annually.
To qualify, you must:
- Pass either the Physical Presence Test (330 full days abroad in a 12-month period)
- Or meet the Bona Fide Residence Test (live in a foreign country for at least one full tax year)
Pros of FEIE:
- Simple way to exclude income from U.S. taxation
- Does not require paying foreign taxes
- Also allows partial housing exclusion in high-cost locations
Cons:
- Applies only to earned income—not passive income or dividends
- May reduce eligibility for other tax credits
- Requires careful tracking of travel days
Foreign Tax Credit vs. Foreign Earned Income Exclusion: Key Differences
Still not sure which is better for your situation? Here’s how the two compare:
| Factor | Foreign Tax Credit | Foreign Earned Income Exclusion |
|---|---|---|
| Best for | Expats in high-tax countries | Expats in low- or no-tax countries |
| Applies to | Earned and passive income | Earned income only |
| Max benefit | Up to full foreign tax paid | Up to ~$120,000 (2023) |
| Form used | Form 1116 | Form 2555 |
| Housing benefit | No | Yes, with exclusions |
| Travel requirement | None | Yes (physical presence or residence) |
Can You Use Both the FTC and FEIE?
Yes—but with important limitations. You can’t claim both on the same income.
For example:
- You can use FEIE to exclude your salary.
- Then apply the Foreign Tax Credit to any dividends or rental income.
Careful planning is essential to avoid double-dipping, which can trigger IRS scrutiny or reduce your tax savings. This is where Dimov Tax comes in—helping clients legally combine both tools without overlap or errors.
Choosing the Right Option Based on Your Country
Your host country’s tax rate can dramatically affect your decision.
Here’s how to decide:
- High-tax countries (UK, Germany, France): The Foreign Tax Credit usually makes more sense, as you’ll likely pay more to your host country than the IRS would have charged.
- Low- or no-tax countries (UAE, Singapore, Cayman Islands): You’ll benefit more from the FEIE, since there’s little or no foreign tax to credit.
- Mixed tax systems (Thailand, Mexico): You might need to split strategies—exclude what you can and credit the rest.
What If You’re Self-Employed Abroad?
FEIE can still apply to self-employed expats, but it doesn’t eliminate self-employment tax (Social Security + Medicare, around 15.3%).
In this case:
- You may need to file Schedule C with Form 1040
- Consider Totalization Agreements—treaties with certain countries to avoid paying U.S. self-employment tax if you’re already contributing to that country’s equivalent system
Dimov Tax can help determine which agreements apply and how to structure your earnings for the most benefit.
Filing Tips for Expats Using FTC or FEIE
Staying compliant is just as important as maximizing savings. Here are expert filing strategies to avoid costly mistakes:
- Keep excellent records: You’ll need proof of foreign taxes paid, travel dates, and residency.
- File even if you owe nothing: Expats still need to file annually to claim exclusions or credits.
- Use the automatic extension: Expats get until June 15—but interest still accrues after April 15.
- Don’t forget FBAR and FATCA: Reporting foreign bank accounts and assets is separate but essential.
- Consult a professional: International tax is full of gray areas, and penalties for errors are steep.
Common Mistakes Expats Make
Avoid these pitfalls that can lead to audits or missed savings:
- Double-claiming FTC and FEIE on same income
- Missing Form 2555 or Form 1116 attachments
- Forgetting to renew FEIE elections after moving
- Incorrectly calculating physical presence days
- Neglecting foreign asset disclosures (FBAR, FATCA)
Dimov Tax sees these errors often—and helps clients fix them before they become costly.
What If You’ve Chosen the Wrong Method in Past Years?
Many expats find out—too late—that they could have saved more by choosing a different method. Maybe you claimed the Foreign Earned Income Exclusion when the Foreign Tax Credit would have offered greater savings, or vice versa. The good news? The IRS allows certain corrections.
Here’s how Dimov Tax helps you fix it:
- File an amended return: We’ll review your prior filings and help you submit Form 1040-X to adjust your election.
- Revoke or change your FEIE election: If you’ve used the FEIE for multiple years, revoking it requires IRS approval—but it’s possible with a strategic plan.
- Recover missed deductions or credits: We’ll identify and recover eligible refunds, even from past years, where applicable.
Mistakes don’t have to be permanent. With the right guidance, you can correct your path and secure better outcomes going forward.
How Dimov Tax Helps Expats Choose the Right Strategy
With clients in over 40 countries, Dimov Tax brings international expertise to your corner. We help expats:
- Analyze income streams and local tax rates
- Model side-by-side outcomes of FTC vs. FEIE
- Maximize housing exclusions and treaty benefits
- Stay compliant with all foreign disclosure rules
- File multi-year back returns if needed
Whether you’re new to life abroad or planning for retirement overseas, our team builds a custom tax plan that saves you money—and gives you peace of mind.
Ready to Minimize Your U.S. Taxes While Living Abroad?
Choosing between the Foreign Tax Credit and Foreign Earned Income Exclusion isn’t just a formality—it’s a strategic decision that can save you thousands of dollars each year.
Let Dimov Tax guide you through the rules, calculations, and filing requirements to ensure you’re not leaving money on the table—or risking compliance mistakes.
Need help deciding between FTC and FEIE? Contact Dimov Tax today for a personalized expat tax strategy.