One of the most common questions US citizens living abroad ask is how to avoid paying tax to both their host country and the IRS on the same income (double taxation). The two primary tools the IRS provides are the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC).
Choosing the wrong one is one of the costliest errors an expat can make.
The Foreign Earned Income Exclusion (FEIE)
The FEIE (claimed on Form 2555) allows you to exclude a significant amount of your earned foreign income (over $120,000 for 2023) from US federal income tax.
- Pros: It’s a clean exclusion that simplifies your US tax calculation. It’s often the best choice for those living in low-tax or zero-tax countries (like UAE or Monaco) because you have little-to-no foreign tax to claim as a credit anyway.
- Cons: It can only be used on earned income (salary, freelance pay). It cannot be used against US self-employment tax (Social Security/Medicare). Crucially, you must meet the Physical Presence Test or the Bona Fide Residence Test.
The Foreign Tax Credit (FTC)
The FTC (claimed on Form 1116) provides a dollar-for-dollar credit against your US tax liability for income taxes you paid to a foreign government.
- Pros: It is generally better for expats living in high-tax countries (like most of Western Europe, Canada, or Australia). In many cases, the foreign tax rate is higher than the US rate, meaning the FTC can completely zero out your US tax liability on that income. It is easier to qualify for than the FEIE.
- Cons: It requires complex calculations to determine the exact amount of credit allowable, and you can only credit taxes paid on foreign-sourced income.
Why Residency Status is the Prerequisite to the Choice
Before you can even begin this calculation, you must first confirm you are compliant and eligible.
- If you choose the FEIE: You need to confirm you pass the complex 330-day Physical Presence Test (or the Bona Fide Residence Test). If you fail this test, the FEIE is invalid, and you suddenly owe tax on all that income.
- If you choose the FTC: You need to confirm your income is correctly sourced to the foreign country, which depends heavily on your physical location and residency status while the work was performed.
The most powerful strategy is to first validate your physical location and residency status, and then decide which tool (FEIE or FTC) maximizes your savings. Trying to make this choice without a certified residency report is putting the cart before the horse.
Need help choosing the most tax-advantaged path?
The decision between FEIE and FTC rests entirely on your underlying residency status and eligibility for the Physical Presence Test. Stop relying on outdated calculators or general advice. The ResidencyCheck Compliance Agent provides the definitive, auditable report on your SPT/PPT status, giving you the foundation you need to choose the optimal tax strategy and avoid double taxation.
Take the first step toward saving thousands. Run your ResidencyCheck today.