What's the Difference Between the Foreign Tax Credit and the Foreign Earned Income Exclusion?

Americans living abroad can use either the Foreign Tax Credit or the Foreign Earned Income Exclusion to avoid being taxed twice on the same income, but they work in different ways. The Foreign Earned Income Exclusion (FEIE) lets qualifying expats exclude up to $126,500 of foreign-earned income from U.S. taxes in 2024, which can eliminate most or all of their U.S. tax liability if their income is below that threshold. The Foreign Tax Credit gives you a dollar-for-dollar credit against your U.S. tax bill for income taxes you paid to a foreign government — it's more useful when you're paying more in foreign taxes than you would owe in the U.S. You can't use both methods on the same income, but some expats use the exclusion for earned income and the tax credit for investment income. The right choice depends on your income level, the tax rates in your host country, and whether you have any investment income.