Foreign Tax Credit vs. Foreign Earned Income Exclusion: Which Is Better?

Expats who pay income tax to a foreign country can use either the Foreign Earned Income Exclusion (FEIE) or the Foreign Tax Credit (FTC) — but not both on the same income. The FEIE simply removes foreign-earned income from your US taxable income, which is straightforward but can leave a gap if you also have US-source income. The FTC, claimed on Form 1116, gives you a dollar-for-dollar credit for foreign taxes paid, which can be more valuable if your foreign tax rate is close to or higher than the US rate. If your foreign tax rate is lower than the US rate, the FEIE may shelter more income; if your foreign tax rate is higher, the FTC may reduce your US tax to zero while creating excess credits you can carry over. Many expats should model both options before choosing, and the choice can be changed in future years under certain conditions.