Why the FTC Is Better Than the FEIE for Many U.S. Expats

Filing U.S. taxes as an expat can be complex. However, understanding the benefits of the Foreign Tax Credit (FTC) versus the Foreign Earned Income Exclusion (FEIE) can help.

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We notice that many expats claim the Foreign Earned Income Exclusion (‘FEIE’) over the Foreign Tax Credit (“FTC”). While the FEIE is usually the only expat tax break available for expats who live in countries that do not levy local income tax, we want to demonstrate why claiming the FTC, where possible, is much more advantageous than claiming the FEIE.

If you are not familiar with these expat tax breaks, we recommend first reading our basic article on expat taxes.

When to claim the FEIE and when to claim the FTC?

The Foreign Earned Income Exclusion is only beneficial for expats who live and work in a country with no income tax (e.g., the United Arab Emirates), or in a country with a lower income tax rate than the US (e.g., Singapore). Let’s illustrate this with two examples:

Example – when to claim the FEIE

Pat has a 5 year assignment in Hungary which has a 10% tax rate. As Pat paid tax in Hungary, Pat is eligable to claim the FTC. However, the FTC is likely to be less beneficial than the FEIE, as the Hungarian rate is lower than the US rate. In this scenario, the Hungarian taxes that Pat paid cannot offset the US taxes Pat would owe, and therefore it is generally better for Pat to claim the FEIE.

When expats live and work in a country with the same or higher tax rate than the US tax rate, you should claim the FTC as the FEIE will bring disadvantages. This will be illustrated further with the help of examples. It is as simple as that!

Example – when to claim the FTC

Pat has a 5 year assignment in the Netherlands which has a 40% tax rate. As Pat paid tax in the Netherlands, Pat should be eligable to claim the FTC. In this scenario the FTC can be more beneficial than the FEIE as the Dutch tax rate is higher than the US rate, therefore the Dutch taxes that Pat paid can offset the US taxes entirely that Pat would owe, and therefore it is better to claim the FTC.

Reason #1 – simplicity!

Filing form 1116 (FTC) has a lot less information and foreign residency requirements compared to filing the Form 2555 (FEIE):

• Form 2555 (FEIE) requires a lot of information about an expat’s foreign employer, address, time abroad, family, etc. This can be very tedious, especially when counting travel days!
• Form 1116 (1116) does not require such information. This means that you can complete your expat tax return significantly faster when you claim the FTC and file Form 1116, as compared to claiming the FEIE and filing Form 2555.
• Form 2555 (FEIE) can only be used when an expat taxpayer fulfills several strict requirements. For example, you need to check whether you meet the Physical Presence Test or the Bona Fide Residence Test. If you choose to claim the FTC, these tests are irrelevant, and therefore counting days abroad is also no longer needed!

Reason #2 – if you have dependents, you may get a refund!

US expats who claim the FEIE are ineligible to claim the Additional Child Tax Credit (‘ACTC’). For tax year 2025, the Additional Child Tax Credit is a refundable tax credit of up to $1,700 per child (tax year 2025 amounts).

However, claiming the FTC allows expats to still claim the Additional Child Tax Credit, creating a bigger refund! Let’s illustrate this with an example:

Example

Pat lives in the Netherlands and earns $100,000 and has paid on average of 42% Dutch income tax rate. The US has a lower income tax rate than the Netherlands, so Pat will be able to claim the FTC and completely offset any US tax bill on their foreign income, and end up owing no US taxes. Pat also has a son Nick, making Pat eligible for the ACTC. However, Pat could also claim the FEIE and end up owing no US taxes as well.

In both scenarios (FTC and FEIE), Pat is able to claim an expat tax break and owe no US taxes. However, if Pat claims the FTC, Pat will expect a refund of $1,700. Meanwhile, if Pat claimed the FEIE, Pat would not get a refund!

In this example, Pat is better off claiming the FTC and getting a refund as compared to claiming the FEIE and not getting anything!

Reason #3 – flexibility!

Once you claim the FEIE, you are stuck with this election for 5 years. If you claim the FEIE in one year, and then claim the FTC in another year, the IRS will consider your election to claim the FEIE “revoked”. What this means, is that if you want to claim the FEIE again within 5 years then you need to request and receive special permission from the IRS before doing so, which is a tedious and expensive process.

Reason #4 – excess tax credits for future years!

In countries that levy income taxes at a rate higher than the US, expats can use the FTC to offset any US tax liability, while building up an FTC carryforward to use in future years! Unused FTCs can be carried forward for 10 years!

Example

Pat lives and works in Germany and makes $100,000 in Year 1. She paid $40,000 in German taxes, and would have owed $15,000 in US taxes. However, Pat decided to claim the FEIE and all of her foreign income was excluded from US tax.

At the end of year 1, Pat receives an offer to work in Dubai for a salary of $150,000. Dubai does not have any income taxes. Pat decides to take this job and starts working in Dubai in year 2.

Pat decided to file her US expat taxes in year 1 by claiming the FEIE. Now that Pat lives in Dubai in year 2, she is not subject to tax (UAE does not levy an income tax). As Pat chose the FEIE in year 1, Pat also needs to claim the FEIE for her US expat tax return in year 2. Assuming the FEIE allows an exemption of up to $120,000, Pat is subject to US income tax on the remainder of her income above the excluded $120,000.

If Pat has decided to claim the FTC in year 1, instead of the FEIE, she would have built up an FTC carry forward. What this means is that the excess of her German taxes over the US taxes owed can be used by Pat in future years. In the example above, Pat would have had an FTC carryforward of $25,000 ($40,000 taxes paid in Germany, less $15,000 credit used against US taxes owed).

This FTC carryforward of $25,000 would have been available for Pat in year 2 and offset any remaining US taxes owed on her income above the excluded $120,000 amount. Poor Pat!

Reason #5 – IRA and 401k accounts!

Claiming the FEIE precludes expats from contributing to tax priveliged retirement accounts, such as employer sponsored 401ks, Roth, and Traditional IRAs, from amounts that are excluded by the FEIE. Contributing to such accounts with income excluded using the FEIE can lead to penalties and interest.

However, no such rule exists if an expat claims the FTC instead. Therefore, expats claiming an FTC can still participate in such retirement accounts!

Why use Expatfile?

Does the above sound confusing? Don’t worry, Expatfile was designed to pick the best expat tax break for you, so you don’t need to decide if the FEIE or the FTC is best for you. Our algorithms run thousands of scenarios based on your input, and recommends the best expat tax breaks for you. Check out our pricing to see what package is best for you!

What's the difference between the Foreign Tax Credit and the Foreign Earned Income Exclusion?

Foreign Earned Income Exclusion (FEIE) allows expats to exclude up to $130,000 (2025 limit) of foreign-earned income from U.S. taxation, provided they meet the Bona Fide Residence Test or the Physical Presence Test.

Why is the Foreign Tax Credit generally considered better than FEIE?

FTC can prevent double taxation without excluding income entirely from your U.S. return, allowing you to use foreign taxes paid as credits rather than as income exclusions. This means your total foreign income, including passive income, is fully reported but offset by credits. Moreover, the FEIE excludes only earned income up to the maximum threshold.

• FTC applies to both foreign earned and foreign passive income
• No residence test needed for FTC
• Unused FTC can be carried forward

You can combine FTC and FEIE, but for many, relying on FTC maximizes savings and long-term retirement benefits.

How does the Bona Fide Residence Test affect eligibility for FEIE?

To claim FEIE under the Bona Fide Residence Test, you must be a U.S. citizen or resident alien who has established a bona fide residence in a foreign country for an uninterrupted period that includes an entire calendar year. The IRS scrutinizes your intent, ties to the foreign country, and the nature of your stay. They want to establish not just physical presence but a genuine residence status.

Are there limitations or downsides to using the Foreign Earned Income Exclusion?

Beyond the income cap limit, the FEIE only applies to earned income (like salary, wages, and self-employed income) and excludes unearned income, like investment dividends and rental income. It does not reduce self-employment Social Security and Medicare taxes, so self-employed expats still owe those taxes.

However, there could be scenarios where the tax payers also have U.S.
sourced income which cannot be offset by foreign tax credits or FEIE.
In those cases, using the foreign earned income exclusion may prove
beneficial since it would exclude the foreign sourced income, leaving
behind the standard deduction or itemized deduction that helps to
further offset the U.S. sourced income. For example, Pat has foreign wages of $100,000 and net rental income from the U.S. in the amount of $12,000. The foreign earned income exclusion will exclude $100,000 of foreign wage income and the standard deduction available to Pat can fully offset the rental income. In contrast if the foreign tax credit is used, the gross income of $112,000 (wage income + rental) will be first offset by the available standard deduction proportionately allocated between the wage
income and rental.The foreign tax credit gets applied on the
remaining portion of wage income leaving behinda portion of the
U.S. rental income taxable.

Can I claim Foreign Tax Credit and Foreign Earned Income Exclusion on the same tax return?

Although income excluded under the FEIE cannot be used to claim a Foreign Tax Credit on that income, you can combine them so some income is excluded using FEIE, and other income (like foreign sourced passive income) is credited using FTC. This strategy requires careful tax planning and documentation using IRS Forms 2555 for FEIE and 1116 for FTC.

Many expats use this method to maximize tax savings, especially if they live in high-tax countries where foreign taxes paid could exceed the amounts excluded by FEIE. Expatfile simplifies the process, helping you determine when combining FTC and FEIE makes sense to minimize U.S. tax liability.

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This article was reviewed by Teby, IRS Enrolled Agent

Updated: January 21, 2026