Choosing Between the FEIE and the Foreign Tax Credit Each Year

The decision between the Foreign Earned Income Exclusion and the Foreign Tax Credit is not always permanent: you can use the FTC in years when it works better, and the FEIE in years when it is more advantageous, but switching from the FEIE back to the FTC after you have already elected the FEIE requires IRS approval for the first five years after your original election. The FEIE tends to be better in low-tax or no-tax countries, where you have little foreign tax to credit and the exclusion can eliminate US tax entirely on income up to the annual limit. The FTC tends to be better in high-tax countries, where the foreign tax paid equals or exceeds your US tax on the same income, leaving you with a zero or near-zero US bill. The stacking rule makes the FEIE less attractive for high earners, since excluded income still pushes the remaining taxable income into higher brackets. In your first year abroad and in any transition year, running the numbers both ways with a tax professional is the best way to avoid locking yourself into the wrong choice.