Foreign Earned Income Exclusion vs Foreign Tax Credit: Which Is Better for US Expats?

One of the most common questions US expats ask is whether they should use the Foreign Earned Income Exclusion (FEIE) or the Foreign Tax Credit (FTC).

Both are designed to prevent double taxation, but they work very differently. Choosing the wrong one can cost you thousands over time — or create compliance issues later.

This guide breaks down the differences in plain language so you can understand which option fits your situation best.

How FEIE Works

The Foreign Earned Income Exclusion allows qualifying expats to exclude a portion of foreign-earned income from US taxation.

Key points:

• Applies only to earned income

• Requires passing a residency or physical presence test

• Does not apply to investment income

• Does not eliminate self-employment tax

FEIE is often attractive because it feels simple — exclude income and move on. But simplicity doesn’t always mean optimal.

How the Foreign Tax Credit Works

The Foreign Tax Credit allows you to claim a dollar-for-dollar credit for foreign income taxes paid.

Important details:

• Applies to earned and some unearned income

• No residency test required

• Credits can sometimes be carried forward

• Often better for high-tax countries

FTC doesn’t exclude income. Instead, it offsets US tax with taxes you already paid abroad.

FEIE vs FTC: Side-by-Side Comparison

FEIE may be better if:

• You earn under the exclusion limit

• You live in a low-tax country

• You want simpler annual filings

FTC may be better if:

• You live in a high-tax country

• You earn above FEIE limits

• You want long-term tax flexibility

Long-Term Strategy Matters

Many expats make the mistake of choosing FEIE because it reduces taxes this year, without thinking about future consequences.

For example:

• FEIE can reduce future tax credits

• Switching strategies incorrectly can trigger IRS restrictions

• FTC often performs better over multiple years

Expat tax planning should always be viewed as a long-term strategy, not a one-year decision.

Self-Employed Expats: Special Considerations

For self-employed expats:

• FEIE does not eliminate self-employment tax

• FTC can sometimes offer better results

• Totalization agreements may apply

This is where professional guidance becomes especially important.

Common Mistakes Expats Make

• Automatically choosing FEIE without comparison

• Not recalculating strategy after income increases

• Ignoring future credit limitations

• Using tax software without expat expertise

Choosing the Right Strategy

There is no universal answer. The right choice depends on:

• Income level

• Country of residence

• Tax rates abroad

• Employment type

• Long-term plans

If you’re unsure which strategy fits your situation, Exemplary can review your income, country, and future goals to help you choose the most tax-efficient approach.