Is it better to use Foreign Earned Income Exclusion (FEIE) or Foreign Tax Credit (FTC) when filing US expat taxes?

When the Foreign Tax Credit allows one to reduce their tax owing to zero, we usually choose it. It’s a better option compared to the Foreign Earned Income Exclusion. This ends up being the chosen treatment for our clients in Canada and Western Europe. Why? Because the tax rate in these countries is greater than the one in the United States. If this is not the case, then the Foreign Earned Income Exclusion might bring better treatment.

Why is Foreign Tax Credit a better option for US expats?

  • The fact that after revoking the Foreign Earned Income Exclusion once cannot use it again for another 5 years (IRC 911(e)(2)). Hence, by using the Foreign Tax credit, one can revert to the FEIE.
  • While the best outcome with the FEIE is a zero tax liability, the FTC generates carryovers for future years. Even if you are moving to a low tax country, you can use such carryovers. It can, however, only be applied against foreign-sourced income.
  • The Additional Child Tax Credit is a refundable tax credit allowing one to receive up to $2,000 per child per year (2018; it was previously $1,000 per child per year). However, you cannot claim this credit when the FEIE is used. The FTC needs to be the venue to reduce US tax.

Today we prepared this easy tax infographic for you. It explains the main differences and what you need to know before choosing one of the options to save money on your tax return. Feel free to contact us regarding your tax situation and we will come back to you within 24 hours after receiving your message.

foreign earned income exclusion vs foreign tax credit