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Escape Double Taxation: Foreign Income Exclusion vs Tax Credit (FEIE vs FTC)
The nightmare of double taxation haunts countless Americans living abroad. That sinking feeling when tax season arrives—wondering if you'll truly have to pay taxes both in your new home and to the IRS—can overshadow the excitement of your international lifestyle. But there's powerful relief available that many expats don't fully understand or utilize effectively.
This deep dive explores the two most important provisions designed specifically to alleviate this burden: the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). While both aim to prevent double taxation, they operate through fundamentally different mechanisms, offering distinct advantages depending on your unique situation.
The FEIE allows qualifying taxpayers to exclude up to $130,000 (for 2025) of foreign earned income from US taxation entirely. We break down the qualification requirements—either establishing bona fide residence abroad or meeting the physical presence test of 330 days outside the US in a 12-month period. Each approach has specific benefits and limitations worth understanding before making your choice.
For those earning above the FEIE threshold or living in higher-tax countries like much of Western Europe, the FTC offers a dollar-for-dollar credit against your US tax liability based on taxes paid to foreign governments. With no income cap and the ability to carry unused credits forward for ten years, it provides significant flexibility for higher earners.
Beyond immediate tax savings, your choice between these provisions has long-lasting implications for retirement planning, investment strategies, and even Social Security benefits. We highlight critical pitfalls to avoid, including how FEIE can affect your ability to contribute to IRAs and the five-year lockout period if you switch from FEIE to FTC.
Whether you're an established expat or considering an international move, mastering these tax provisions is essential for protecting your financial future while enjoying your global lifestyle. Subscribe to our podcast for more expert insights on navigating the complexities of international taxation and wealth management.
For detailed information, consult IRS Publication 54 (Tax Guide for US Citizens and Resident Aliens Abroad) and Publication 514 (Foreign Tax Credit for Individuals).
For easier reading, start with "U.S. Taxes for Americans Working Abroad: FEIE vs. FTC".
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Moving, Working, and Investing for Americans Abroad
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By The Expat SageThe nightmare of double taxation haunts countless Americans living abroad. That sinking feeling when tax season arrives—wondering if you'll truly have to pay taxes both in your new home and to the IRS—can overshadow the excitement of your international lifestyle. But there's powerful relief available that many expats don't fully understand or utilize effectively.
This deep dive explores the two most important provisions designed specifically to alleviate this burden: the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). While both aim to prevent double taxation, they operate through fundamentally different mechanisms, offering distinct advantages depending on your unique situation.
The FEIE allows qualifying taxpayers to exclude up to $130,000 (for 2025) of foreign earned income from US taxation entirely. We break down the qualification requirements—either establishing bona fide residence abroad or meeting the physical presence test of 330 days outside the US in a 12-month period. Each approach has specific benefits and limitations worth understanding before making your choice.
For those earning above the FEIE threshold or living in higher-tax countries like much of Western Europe, the FTC offers a dollar-for-dollar credit against your US tax liability based on taxes paid to foreign governments. With no income cap and the ability to carry unused credits forward for ten years, it provides significant flexibility for higher earners.
Beyond immediate tax savings, your choice between these provisions has long-lasting implications for retirement planning, investment strategies, and even Social Security benefits. We highlight critical pitfalls to avoid, including how FEIE can affect your ability to contribute to IRAs and the five-year lockout period if you switch from FEIE to FTC.
Whether you're an established expat or considering an international move, mastering these tax provisions is essential for protecting your financial future while enjoying your global lifestyle. Subscribe to our podcast for more expert insights on navigating the complexities of international taxation and wealth management.
For detailed information, consult IRS Publication 54 (Tax Guide for US Citizens and Resident Aliens Abroad) and Publication 514 (Foreign Tax Credit for Individuals).
For easier reading, start with "U.S. Taxes for Americans Working Abroad: FEIE vs. FTC".
Send us a text
Moving, Working, and Investing for Americans Abroad