FEIE vs. Foreign Tax Credit: Which Should You Choose in 2026?

One of the most important decisions American expats make each year is whether to claim the Foreign Earned Income Exclusion (FEIE) or the Foreign Tax Credit (FTC). Sometimes you can use both, but choosing the right strategy can save you thousands of dollars.

Let me walk you through how each works and when to use them.

The Foreign Earned Income Exclusion (FEIE)

The FEIE, claimed on Form 2555, allows you to exclude foreign earned income from U.S. taxation. For tax year 2025 (filed in 2026), you can exclude up to $130,000 of foreign earned income.

How It Works

If you qualify for the FEIE and earn $100,000 working abroad, you can exclude that entire amount from your U.S. taxable income. Result: zero U.S. tax on that income.

Who Qualifies

To claim the FEIE, you must:

1. Have foreign earned income (wages, salaries, self-employment income — not investment income)
2. Have your tax home in a foreign country
3. Meet either the Bona Fide Residence Test or the Physical Presence Test

Bona Fide Residence Test: You must be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year.

Physical Presence Test: You must be physically present in a foreign country for at least 330 full days during a 12-month period.

The Housing Exclusion

In addition to the income exclusion, you can also exclude or deduct certain foreign housing costs above a base amount. This is especially valuable in high-cost cities.

The Foreign Tax Credit (FTC)

The Foreign Tax Credit, claimed on Form 1116, gives you a dollar-for-dollar credit against your U.S. tax liability for income taxes paid to foreign governments.

How It Works

Say you earn $100,000 abroad and pay $25,000 in local income taxes. With the FTC, you can claim up to $25,000 as a credit against your U.S. taxes. If your U.S. tax bill on that income would be $20,000, the FTC wipes it out entirely — and you may carry forward excess credits.

Who Qualifies

You can claim the FTC if you:

1. Paid or accrued foreign income taxes
2. The taxes are imposed on you
3. The taxes are legal and actual foreign tax liability

There are limitations based on income categories and sourcing rules, but most employed expats qualify.

FEIE vs. FTC: A Side-by-Side Comparison

| Factor | FEIE | FTC | |--------|------|-----| | Maximum benefit | Exclude up to $130,000 (tax year 2025) | Credit for all foreign taxes paid | | Best for | Low-tax countries | High-tax countries | | Earned income limit | Yes, capped at exclusion amount | No cap | | Self-employment tax | Still owed | Can't offset SE tax | | Investment income | Not covered | Can be covered | | Excess credits | N/A | Carry forward 10 years |

When to Use the FEIE

The FEIE is typically better when:

• You live in a low-tax or no-tax country (UAE, Panama, certain cases)
• Your income is below the exclusion amount
• You want to simplify your tax situation
• You have significant housing costs to exclude

Example: FEIE Wins

Sarah earns $90,000 working remotely from Portugal. Portugal's tax rates are moderate, and she pays about $15,000 in Portuguese taxes.

With the FEIE, she excludes her entire $90,000. U.S. tax: $0 (on that income).

With the FTC, she'd owe U.S. tax on $90,000, then credit $15,000 against it. She might still owe something.

Winner: FEIE

When to Use the Foreign Tax Credit

The FTC is typically better when:

• You live in a high-tax country (UK, Germany, France, Scandinavia)
• Your income exceeds the FEIE limit
• You have investment income from foreign sources
• You want to preserve excess credits for future years

Example: FTC Wins

James earns $180,000 working for a German company. He pays 40% in German taxes — about $72,000.

With the FEIE, he excludes $130,000 but still owes U.S. tax on $50,000 — and can't use his German taxes to offset it.

With the FTC, he can credit his substantial German taxes against his entire U.S. liability. He likely owes nothing and has excess credits to carry forward.

Winner: FTC

Can You Use Both?

Yes, but with limitations. You cannot claim the FTC for taxes paid on income you excluded with the FEIE. However, if you have income above the exclusion amount, you can:

• Exclude the first $130,000 with FEIE
• Claim FTC for taxes paid on income above $130,000

This combination strategy works well for high earners in high-tax countries.

The FEIE's Hidden Cost: Stacking

One often-overlooked issue with the FEIE is tax bracket stacking. When you exclude income with the FEIE, your remaining taxable income still starts at the higher tax brackets — as if you earned that excluded income.

This means if you have other income (investments, rental, etc.), it could be taxed at higher rates than you'd expect.

Making the Right Choice

Here's my general guidance:

1. Low-tax country + income under $130K → FEIE
2. High-tax country → FTC (usually)
3. High earner in high-tax country → FTC or combination
4. Significant investment income → FTC likely better
5. Planning to return to the U.S. → Consider FTC for carried credits

The best choice depends on your complete financial picture. If you're unsure, let's talk through your specific situation.

One More Thing: Revoking the FEIE

If you've claimed the FEIE and want to switch to the FTC, be aware that revoking your FEIE election means you cannot re-elect it for five years without IRS approval.

Think carefully before switching strategies.

The Bottom Line

There's no universally "better" option — it depends on where you live, how much you earn, and what types of income you have. Run the numbers both ways, or work with someone who can help you optimize your situation.

The difference between the right and wrong choice can easily be $10,000 or more in taxes. It's worth getting it right.