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FEIE or Foreign Tax Credit?
Both can reduce US tax on foreign income, but they work differently. The better choice depends on your income, the tax you pay abroad, and your plans.
| Topic | FEIE Form 2555 | Foreign Tax Credit Form 1116 |
|---|---|---|
| How it works | Excludes qualifying foreign earned income from US taxable income, up to the annual limit. | Reduces US tax dollar for dollar for eligible foreign income taxes, within limits. |
| Income covered | Foreign earned income only. | Can apply to earned income and other foreign income, such as investment income. |
| To qualify | A foreign tax home, plus the bona fide residence or physical presence test. | You paid or accrued eligible foreign income tax. |
| Often considered when | You pay little or no foreign income tax and your income is near or under the limit. | You live in a higher-tax country or earn well above the limit. |
| Watch out for | Remaining income is taxed at higher brackets, and filing Form 2555 rules out the Additional Child Tax Credit. If you revoke the choice, you generally can't use it again for five years without IRS approval. | You can't take a credit for foreign tax on income you excluded. Unused credits can generally carry back one year and forward ten. |
Which should you look at first?
A starting point, not a recommendation. The right choice depends on your full return, so run both before you decide.
Questions about this
Can I use both the FEIE and the Foreign Tax Credit?
You can use both in the same year, but not on the same income. You can't take a credit for foreign tax on income you excluded.
What is the Foreign Earned Income Exclusion?
It lets qualifying US citizens and resident aliens living abroad exclude foreign earned income from US taxable income, up to an annual limit. The IRS limit is $130,000 for 2025, $132,900 for 2026 and $137,300 for 2027.
Does the FEIE cover self-employment tax?
No. The FEIE can reduce income tax, but self-employment tax can still apply. A totalization agreement may affect this in some countries.
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