Ahh the lovely world of US expat taxation…
For U.S. citizens and green card holders living abroad, one of the most important tax planning decisions is the battle between the Foreign Earned Income Exclusion vs. Foreign Tax Credit. Both provisions are designed to prevent double taxation on income earned overseas, yet they work in pretty different ways and can have long-term implications for your tax planning. At Advington Stone, we run both scenarios for every client before making a recommendation, given the right choice depends heavily on income level, host country tax rates, and future financial goals as well as your plans. Our international tax services are tailor made for expats wanting clarity and responsive support.
The Foreign Earned Income Exclusion (FEIE)
The Foreign Earned Income Exclusion, claimed on Form 2555, allows qualifying individuals to exclude up to $130,000 (for 2025) of earned income from U.S. taxation. To qualify, taxpayers must meet either the Bona Fide Residence Test (a full tax year of residence in a foreign country) or the Physical Presence Test (at least 330 days abroad in a 12-month period). Importantly, the FEIE does not exclude an individual from self employment taxes if they live in a non-totalization agreement country.
FEIE applies only to earned income; that is, wages, salaries, or self-employment income. Dividends, interest, capital gains, and rental income cannot be excluded.
The main advantage of the exclusion is simplicity. If your foreign earned income is below the exclusion limit, you can often reduce your U.S. tax liability to zero. It’s particularly attractive for Americans in low-tax jurisdictions such as the UAE, Singapore, or Hong Kong.
FEIE does come with drawbacks though. Excluding income also excludes the associated foreign tax credits, meaning you can’t later offset U.S. tax on that same income. More importantly, excluded income doesn’t contribute to IRA eligibility and may reduce Social Security benefits if you’re self-employed. The exclusion also uses a “stacking rule”—even if your excluded income isn’t taxed, it still determines the marginal rate applied to your remaining U.S.-taxable income (such as dividends or capital gains). FEIE can also be unusable for 5 years if “revoked”, IE it had been used in years past but not used in a later year.
FEIE ultimately reduces taxable income but not necessarily the tax rate applied to your other earnings. The FEIE and FTC can indeed be used together if you’re income is above the FEIE threshold, however as stated earlier, FTC’s cannot apply to income that has already been excluded.
The Foreign Tax Credit (FTC)
The Foreign Tax Credit, claimed on Form 1116, works a bit differently. It allows taxpayers to offset U.S. tax dollar-for-dollar with taxes paid to a foreign government on the same income. The credit can apply to both earned and passive income, and excess credits can often be carried forward for up to ten years (or back one year).
The FTC is particularly advantageous for Americans living in high-tax countries such as the UK, France, Germany, or Canada. Because foreign tax rates in these jurisdictions typically exceed U.S. rates, the credit often fully eliminates any residual U.S. liability, without needing to exclude income at all.
Unlike FEIE, income covered by the FTC still “counts” for IRA contributions, which can be a key factor for long-term planning. The downside is complexity (ask us how we know). Form 1116 is detailed, and credits must be calculated separately for different “baskets” of income. Timing differences (for example, foreign taxes paid in the next calendar year) can also complicate calculations.
Choosing Between FEIE and FTC
At Advington Stone, we evaluate both options for every expatriate client using side-by-side tax modeling. But in general terms, FEIE often benefits those in low-tax or no-tax jurisdictions with moderate income below the exclusion threshold. FTC usually favors those in high-tax countries or with income exceeding the FEIE limit.
In some cases, a hybrid approach produces the best outcome, though this requires careful allocation and documentation.
We also consider future impact: clients who may repatriate to the U.S., invest in retirement accounts, or plan for U.S. Social Security benefits often find FTC-based strategies more sustainable long term. Meanwhile, contractors or remote workers in tax-free regions may find FEIE perfectly sufficient.
Our Approach
No two expatriate situations are identical. At Advington Stone we start every engagement by reviewing residency status, income composition, and foreign tax obligations. We then compare the foreign earned income exclusion vs. foreign tax credit, including state tax implications, and project multi-year results. This ensures our recommendation aligns with each client’s broader financial and career trajectory.
For Americans abroad, understanding the FEIE and FTC is essential to optimizing global tax exposure. Choosing correctly can save thousands each year and, more importantly, prevent costly mistakes in future filings.