FEIE vs. Foreign Tax Credit: Which Saves You More as an Expat?

The United States is one of only two countries in the world (alongside Eritrea) that taxes its citizens on worldwide income regardless of where they live. If you are an American living abroad, you owe US federal income tax on every dollar you earn, whether it comes from a job in Berlin, freelance clients in Bangkok, or rental income from a property in Lisbon. This creates a real risk of double taxation — paying taxes to both the US and your country of residence on the same income.

Two primary mechanisms prevent this: the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). Choosing between them — or combining them strategically — can save you thousands of dollars annually. Yet most expats pick one without fully understanding the other, or worse, use the wrong one for their situation and overpay for years. This guide breaks down both tools, compares them head-to-head across different income scenarios, and helps you determine which strategy is right for your specific circumstances.

If you are still in the planning phase of your move, our guide to leaving the US covers the full picture, and our comprehensive expat tax guide provides broader context on all US tax obligations for Americans abroad.

What Is the FEIE?

The Foreign Earned Income Exclusion (claimed on IRS Form 2555) allows qualifying Americans abroad to exclude up to $126,500 of foreign earned income from US federal income tax (2024 amount, adjusted annually for inflation). If you earn $100,000 working remotely from Portugal, the FEIE lets you exclude the entire amount from your US taxable income. Your federal income tax on that earned income: $0.

To qualify, you must meet one of two tests:

• Physical Presence Test: You are physically present outside the US for at least 330 full days during any 12-month period. This is the more straightforward test. “Full days” means midnight to midnight — your departure and arrival days in the US do not count. You effectively have 35 days of US time per year, enough for holidays and short visits.
• Bona Fide Residence Test: You are a genuine resident of a foreign country for an entire tax year. This requires establishing a real home abroad — not just passing through. Having a visa or residency permit, a local lease, and evidence of community ties all support this test.

The FEIE also includes a Foreign Housing Exclusion that lets you exclude a portion of your housing costs (rent, utilities, renters insurance) above a base amount. The base is 16% of the FEIE limit (approximately $20,240 in 2024), and the maximum exclusion varies by city — high-cost cities like London, Tokyo, and Hong Kong have higher caps. This is a frequently overlooked benefit that can save an additional $5,000–$15,000 per year.

Critical limitation: The FEIE applies only to earned income — salaries, wages, freelance income, and self-employment income. It does not cover investment income, capital gains, rental income, pension distributions, or Social Security benefits.

What Is the Foreign Tax Credit?

The Foreign Tax Credit (claimed on IRS Form 1116) allows you to reduce your US tax bill dollar-for-dollar by the amount of income tax you pay to a foreign government. If you pay $15,000 in German income tax, you can reduce your US federal tax liability by up to $15,000. The logic is simple: you should not be taxed twice on the same income.

The FTC has several important characteristics:

• Dollar-for-dollar credit: Unlike a deduction (which reduces taxable income), a credit reduces your actual tax owed. A $10,000 credit saves you $10,000 in tax, regardless of your bracket.
• Covers all income types: Unlike the FEIE, the FTC can offset taxes on earned income, investment income, capital gains, and passive income. This is a major advantage for people with diversified income streams.
• Carryover rules: If your foreign tax exceeds your US tax liability in a given year (common in high-tax countries), you can carry the excess credit back 1 year or forward up to 10 years. This means overpayments in high-tax years can offset US tax in future lower-tax years.
• No income cap: The FEIE maxes out at $126,500. The FTC has no such limit — it works on any amount of income, making it essential for high earners.

FEIE vs. FTC: Head-to-Head

The right choice depends on three variables: your income level, the tax rate in your country of residence, and the types of income you earn. Here is how they compare across the most common scenarios:

Under $80K in a Low-Tax Country

Winner: FEIE. If you earn $75,000 working remotely from Costa Rica (which has a territorial tax system and does not tax foreign income), you owe zero local tax. With the FEIE, you exclude the entire $75,000 from US federal tax. Your federal income tax: $0. With the FTC, you would have no foreign tax to credit against your US liability, so you would owe the full US tax on $75,000. The FEIE saves you roughly $8,000–$10,000 in this scenario.

$80K–$126K in a Moderate-Tax Country

Winner: Close call — depends on the exact rate. At $110,000 in Portugal (where the tax rate on this income is roughly 35% under standard rates), you would pay approximately $38,500 in Portuguese tax. With the FTC, you credit that $38,500 against your US liability of roughly $18,000, leaving you with $0 US tax owed plus a carryover of about $20,500 in excess credits. With the FEIE, you exclude the entire $110,000 and owe $0 US tax, but you still pay the $38,500 to Portugal and have no carryover benefit.

In this specific case, the FTC gives you excess credits that can offset future US tax on other income (investment gains, for example). If you have only earned income and no plans to earn US-taxable income, the FEIE is simpler with the same net result.

Over $126K

Winner: FTC (usually). The FEIE caps at $126,500. If you earn $200,000, only $126,500 is excluded — the remaining $73,500 is taxed at your marginal US rate. With the FTC, you credit all foreign taxes paid against your entire US liability. In a moderate-to-high-tax country, the FTC eliminates your US tax entirely and may generate carryover credits. For high earners, the FEIE alone is almost never the optimal choice.

High-Tax Country (Any Income Level)

Winner: FTC, always. If you live in a country where your effective tax rate exceeds the US rate on the same income (France, Germany, Netherlands, Sweden, Denmark, Belgium, Japan at higher brackets), the FTC fully offsets your US liability and generates excess credits. The FEIE provides no benefit beyond what the FTC already gives you, and using the FEIE actually prevents you from claiming the FTC on that same income.

Can You Use Both?

Yes, but not on the same income. The IRS allows you to claim the FEIE on a portion of your earned income and the FTC on the remainder — or on different categories of income entirely. A common strategy:

• Use the FEIE to exclude your first $126,500 of earned income (particularly effective if this income would be taxed at a low foreign rate or not at all).
• Use the FTC on earned income above $126,500 and on all investment/passive income.

This combination works well for high earners in moderate-tax countries. However, combining the two is complex and the interaction between the FEIE's “stacking rule” (which pushes remaining income into higher brackets) and the FTC limitation formula creates traps that require professional guidance.

Common Mistakes

The stakes are high here. Choosing the wrong strategy or making filing errors can cost thousands. These are the mistakes that come up most frequently:

• Missing the filing deadline: The FEIE must be claimed on a timely filed return (including extensions). If you miss the deadline, you cannot retroactively claim the exclusion for that year without special procedures. Always file on time, even if you need to estimate.
• Not claiming the Housing Exclusion: Many expats claim the FEIE but forget the Housing Exclusion, leaving $5,000–$15,000 of additional savings on the table. If you pay rent abroad, you almost certainly qualify.
• Electing out of the FEIE without understanding the consequences: If you stop claiming the FEIE (by switching to FTC-only), you cannot re-elect the FEIE for 5 tax years without IRS approval. Make sure the switch is truly beneficial long-term before you make it.
• Forgetting FBAR: This is not technically a FEIE/FTC issue, but it trips up expats constantly. If your foreign bank accounts exceed $10,000 in aggregate at any point during the year, you must file FinCEN Form 114. Penalties for non-filing are up to $10,000 per account per year.
• Ignoring self-employment tax: The FEIE eliminates federal income tax but does not touch self-employment tax (15.3% for Social Security and Medicare). Freelancers who think they owe “nothing” after claiming the FEIE get an unpleasant surprise when the SE tax bill arrives.

FBAR and FATCA

While the FEIE and FTC deal with income tax, two separate reporting requirements deal with foreign financial accounts. Both are mandatory, both carry severe penalties for non-compliance, and both are completely separate from your income tax return:

FBAR (FinCEN Form 114): Required if your foreign financial accounts exceed $10,000 in aggregate at any point during the year. Filed electronically with FinCEN (not the IRS) by April 15 with an automatic extension to October 15. Penalties: up to $10,000 per account per year for non-willful violations; up to $100,000 or 50% of account balance for willful violations.

FATCA (Form 8938): Required if your foreign financial assets exceed $200,000 at year-end (or $300,000 at any point) for single expat filers, or double those thresholds for married filing jointly. Filed with your tax return. Covers a broader range of assets than FBAR, including foreign investment accounts, foreign pension plans, and interests in foreign entities.

These overlap significantly but are filed separately, have different thresholds, and cover slightly different assets. Most expats with meaningful foreign accounts need to file both. Our digital nomad tax guide covers these requirements in more depth.

Next Steps

The FEIE vs. FTC decision is one of the most consequential financial choices you will make as an American abroad. Get it right and you minimize your tax burden legally. Get it wrong and you overpay for years or create compliance headaches that take professional help to untangle.

Start with our tax comparison tool to understand the tax landscape of your destination country. If your situation is straightforward — single source of earned income, one country of residence, income under $126,500 — you can likely handle the FEIE election yourself using tax software that supports Form 2555 (TurboTax, H&R Block Expat, or specialized platforms like MyExpatTaxes).

If your situation involves multiple income types, income above the FEIE threshold, multiple countries, or a decision about whether to switch between FEIE and FTC — invest in a CPA who specializes in international tax for US expats. The cost ($500–$2,000 for annual filing) is almost always recovered through proper optimization.

For the broader picture of moving abroad, including visa options, banking, healthcare, and logistics, see our comprehensive guide to leaving the US. And if you are still choosing your destination, the country matching quiz can help you find the right fit — including countries with tax-friendly regimes that make the FEIE even more powerful.