If you're an American filing US taxes from the UK, you'll quickly meet two ways to avoid being taxed twice on the same income: the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). They're often presented as interchangeable. They aren't — and for most people in the UK specifically, one is usually the better choice. Picking the wrong one can cost you money or close off benefits you'd otherwise keep.
This guide explains the difference in plain English and why the UK's relatively high tax rates change the answer.
The short answer
For most Americans in the UK, the Foreign Tax Credit is usually the better choice. Because UK income tax rates are generally similar to or higher than US rates, the UK tax you already pay typically generates enough credit to wipe out your US tax on the same income — often with extra credit to carry forward. The FEIE excludes a capped amount of earned income but can disqualify you from valuable benefits like the Child Tax Credit and uses up no carryforward. The right choice depends on your income type and family situation.
Key takeaways
- For most Americans in the UK, the Foreign Tax Credit beats the FEIE because UK tax rates are high.
- The FTC can leave surplus credits to carry forward; the FEIE cannot.
- Using the FEIE can disqualify families from the refundable Child Tax Credit.
- The FEIE only covers earned income — not investment income or pensions.
What each one actually does
The Foreign Earned Income Exclusion (FEIE) lets you exclude a capped amount of foreign earned income (wages, salary, self-employment) from US tax, provided you meet a residence or physical-presence test. Key word: earned. It does nothing for investment income, dividends, interest, rental income or pensions.
The Foreign Tax Credit (FTC) gives you a dollar-for-dollar credit against your US tax for foreign income tax you've already paid. It applies to a much broader range of income — earned and unearned — and crucially, where your foreign tax exceeds your US tax on that income, the excess can be carried forward to future years.
| FEIE | Foreign Tax Credit | |
|---|---|---|
| What it does | Excludes capped earned income | Credits foreign tax paid against US tax |
| Income covered | Earned income only | Earned and unearned income |
| Carryforward | None | Surplus credits carry forward |
| Child Tax Credit | Can disqualify you | Usually preserved |
| Best when | Low-tax country, below cap | Higher-tax country (e.g. the UK) |
Why the UK tips the balance toward the FTC
This is the part that's specific to the UK and that generic "FEIE vs FTC" articles often miss. The FEIE is most attractive when you live somewhere with low or no income tax, because you're excluding income that would otherwise be taxed nowhere. But the UK is not a low-tax country — UK income tax rates are broadly comparable to, and often higher than, US rates.
That has two consequences:
- The UK tax you pay usually generates enough Foreign Tax Credit to eliminate your US tax on that income anyway — so you often don't need to exclude it.
- Using the FTC frequently leaves you with surplus credits to carry forward, which can be valuable later — for example, against a future UK pension lump sum or other US tax. The FEIE generates no such carryforward.
The Child Tax Credit trap
Here's the practical clincher for many families. If you use the FEIE to exclude your income, you can disqualify yourself from the refundable Child Tax Credit, because you've excluded the very income the credit is calculated against. Families who use the FTC instead keep their income "on the books" for US purposes — already sheltered by the credit — and can often still claim the Child Tax Credit, which for some households is a meaningful refund. For a family, this single point frequently decides the question.
Want a sense of how the two compare for your numbers? Our double-tax estimator gives you a rough comparison before you commit.
When the FEIE still makes sense
The FTC isn't automatically right for everyone. The FEIE can be the better tool when, for example:
- your income is below the exclusion cap and you have little or no other US tax to credit against,
- you're in a lower-tax situation than typical UK employment (some self-employment or split-year scenarios),
- or your circumstances make the simplicity of exclusion genuinely worthwhile.
There's also a lock-in point to know: if you claim the FEIE and then revoke it, you generally can't claim it again for five years without IRS permission. So switching between the two isn't something to do casually year to year — it's a decision to make deliberately.
Common mistakes we see
- Defaulting to the FEIE because it's the famous one. In the UK, the FTC is often better.
- Using the FEIE and accidentally losing the Child Tax Credit, costing a family more than the exclusion saved.
- Trying to exclude investment or pension income with the FEIE — it only covers earned income.
- Switching back and forth without realising the five-year revocation lock-in.
- Ignoring carryforwards. FTC surplus credits can be quietly valuable in a later year.
Related reading
- Do I pay US tax on my UK pension? — where the Foreign Tax Credit does most of its work.
- What happens if I haven't filed US taxes while living in the UK? — choosing the right method when you're catching up.
This article is general information, not personalised advice. The FEIE-versus-FTC decision depends on your income type, family situation and longer-term plans, and it interacts with credits and carryforwards in ways worth modelling properly. Book a free consultation and we'll work out which approach leaves you better off — this year and in future years.