Comparison
FEIE vs Foreign Tax Credit
The Foreign Earned Income Exclusion and the Foreign Tax Credit are two different ways to prevent double taxation. The FEIE excludes qualifying foreign earned income from US tax; the Foreign Tax Credit reduces US tax by the foreign tax you have already paid. They can be combined, but not on the same income.
Overview
Two routes to the same goal: avoiding double tax
If you are a US person living and working abroad, you may pay tax to the country you live in and still face a US filing obligation on the same income. US tax law offers two main mechanisms to stop that income being taxed twice: the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC).
They achieve a similar aim by very different means. The FEIE excludes qualifying foreign earned income from US tax altogether. The Foreign Tax Credit instead credits the foreign tax you have already paid against your US tax bill. Understanding which lever to pull — or how to combine them — is one of the most consequential decisions in an expat return.
| FEIE (Form 2555) | Foreign Tax Credit (Form 1116) | ||
|---|---|---|---|
| How it works | Excludes qualifying foreign earned income | Credits foreign tax against US tax | |
| Applies to | Foreign earned income (wages, self-employment) | Most categories of foreign-taxed income | |
| Best where foreign tax is high | |||
| Best where foreign tax is low | |||
| Can create carryover | |||
| Involves a formal election | |||
| Common for Americans in the UK |
- How it works
- Excludes qualifying foreign earned income
- Applies to
- Foreign earned income (wages, self-employment)
- Best where foreign tax is high
- Best where foreign tax is low
- Can create carryover
- Involves a formal election
- Common for Americans in the UK
FEIE (Form 2555)
- How it works
- Credits foreign tax against US tax
- Applies to
- Most categories of foreign-taxed income
- Best where foreign tax is high
- Best where foreign tax is low
- Can create carryover
- Involves a formal election
- Common for Americans in the UK
Foreign Tax Credit (Form 1116)
- How it works
- Applies to
- Best where foreign tax is high
- Best where foreign tax is low
- Can create carryover
- Involves a formal election
- Common for Americans in the UK
How to think about the choice
The two mechanisms suit different situations. The exclusion tends to help most where foreign tax on your earnings is low, because it removes income from US tax without needing foreign tax to offset it. The credit tends to help most where foreign tax is high, because it can fully absorb your US liability on that income and may even generate a carryover for future years.
Because the UK is a relatively high-tax jurisdiction, the Foreign Tax Credit is frequently the stronger choice for Americans in the UK — but this is a general pattern, not a rule. The mechanisms also interact: they can be used together across different slices of income, and the FEIE involves an election with lasting consequences. This is exactly the kind of decision our FEIE vs FTC calculator is designed to illustrate.
Which mechanism tends to suit whom
- FEIE often suits those in lower-tax locations or with foreign earned income below the exclusion.
- The Foreign Tax Credit often suits those in higher-tax countries such as the UK.
- People with investment or passive income usually rely on the credit, since the FEIE covers earned income only.
- Many returns use a blend, applying each mechanism to the income it fits best.
Key facts
- FEIE mechanism
- Excludes qualifying foreign earned income
- FTC mechanism
- Credits foreign tax against US tax
- Combinable
- Yes, but not on the same income
- Typical UK pattern
- Foreign Tax Credit often stronger
Related guidance and tools
Frequently asked questions
You can use both in the same return, but not on the same income. Income excluded under the FEIE cannot also generate a foreign tax credit. Many people apply the exclusion to some income and the credit to the rest, which is why the interaction needs modelling.
The FEIE removes qualifying foreign earned income from US taxation entirely. The Foreign Tax Credit instead reduces your US tax dollar-for-dollar by the foreign tax you have already paid. One excludes income; the other credits tax.
It depends on your income mix and the UK tax you pay, but because the UK is a relatively high-tax country, the Foreign Tax Credit is frequently the stronger choice for many people. The right answer is specific to your circumstances and should be modelled.
It can. The exclusion involves an election that carries consequences if later revoked, and switching between mechanisms is not always free of restrictions. This is one reason the decision is best made with the whole picture in view.
Not sure which mechanism fits your situation?
The choice between the FEIE and the Foreign Tax Credit depends on your income mix and the foreign tax you pay. We can model both for you.