If you're a US citizen or green-card holder living abroad, you already know the bad news: the United States taxes you on your worldwide income no matter where you live. The good news is two powerful tools stop you being taxed twice — the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). Choosing the wrong one can cost thousands, and in some cases you can combine them.
What each one does
The FEIE (Form 2555) lets you exclude a chunk of foreign earned income from US tax entirely — up to $130,000 for the 2025 tax year. To qualify you must pass either the physical presence test (330 full days abroad in a 12-month period) or the bona fide residence test.
The FTC (Form 1116) takes a different route: you pay your foreign income tax, then claim a dollar-for-dollar credit against your US tax on the same income. There's no income cap, and it works on more than just salary.
The simple rule of thumb
It usually comes down to how heavily your host country taxes you:
| Your situation | Usually better |
|---|---|
| Low- or zero-tax country (UAE, Qatar, Singapore, much of SE Asia) | FEIE |
| High-tax country (UK, Germany, Australia, most of Western Europe) | FTC |
| Income above the FEIE limit | FTC (or both) |
The logic: in a low-tax country there's little foreign tax to credit, so excluding the income outright (FEIE) saves the most. In a high-tax country your foreign tax usually exceeds the US tax anyway, so the FTC wipes out your US bill and can leave you with carry-forward credits for future years.
Three traps that catch people
- The FEIE can disqualify other benefits. Because excluded income "doesn't exist" for US purposes, it can reduce or remove your Child Tax Credit refund and your ability to contribute to an IRA. The FTC keeps the income on your return, so those benefits survive.
- Revoking the FEIE locks you out for 5 years. If you switch from FEIE to FTC, you generally can't switch back for five tax years without IRS permission — so model it before you elect.
- Self-employment tax still applies. Neither tool removes US self-employment tax (Social Security and Medicare) unless a totalization agreement covers you.
Combining them
High earners in high-tax countries often use both: exclude the first $130,000 with the FEIE (plus the foreign housing exclusion), then claim the FTC on the income above that. It takes careful apportionment, but it can be the lowest-tax outcome of all.
Run your numbers
The right answer depends on your exact income, host-country tax rate and family situation. Compare the two side by side with our free FEIE calculator and Foreign Tax Credit calculator, and check whether you clear the 330-day bar with the Physical Presence Test counter.