Frequently Asked Questions (FAQ) about the Foreign Earned Income Exclusion (FEIE) vs the Foreign Tax Credit (FTC)

  • What is the Foreign Earned Income Exclusion (FEIE), and who is it for?

    The Foreign Earned Income Exclusion (FEIE) is a U.S. tax benefit allowing qualifying American taxpayers who live and work outside the United States to exclude a certain amount of their foreign-earned income from U.S. taxable income. It aims to reduce the tax burden on those paying taxes both in the U.S. and in their country of residence. In 2025, the maximum exclusion amount is the lesser of the foreign income earned or $130,000. You must meet either the Bona Fide Residence Test or the Physical Presence Test to qualify for the FEIE.

  • What is the Foreign Tax Credit (FTC), and how does it work?

    The Foreign Tax Credit (FTC) is a mechanism to prevent double taxation. It allows U.S. taxpayers who pay or accrue income taxes to a foreign government to credit those taxes against their U.S. income tax liability on the same income. To qualify, the tax must be imposed by a foreign country or U.S. possession on income originating from outside the U.S., and the taxpayer must have paid or accrued the tax. The credit cannot exceed the portion of U.S. tax liability attributable to the foreign-earned income. Any unused credit can be carried back one year and forward ten years. Taxpayers claim the FTC on IRS Form 1116.

  • What are the key differences between the FEIE and the FTC?

    The FEIE excludes a certain amount of foreign-earned income from U.S. taxation, while the FTC directly reduces U.S. tax liability by the amount of foreign taxes paid. The FEIE has an income limit ($130,000 in 2025), while the FTC has no income limit. The FTC allows for a carryover of excess credit for up to 10 years. The FEIE is often simpler to claim, but the FTC can be more beneficial for those with higher incomes or who pay higher tax rates in their country of residence. Claiming the FEIE may prevent you from contributing to your IRA.

  • How do I qualify for the FEIE?

    To qualify for the FEIE, you must meet one of two tests: the Bona Fide Residence Test or the Physical Presence Test.

  • What is the Bona Fide Residence Test?

    The Bona Fide Residence Test requires you to establish a home overseas, live there for more than one full calendar year (January 1st to December 31st), and have no immediate intention of returning to live in the U.S. permanently. It focuses on the nature of your stay abroad and your ties to a foreign country. You must establish a permanent residence in a foreign country and demonstrate that you intend to remain there for an indefinite period.

  • What is the Physical Presence Test?

    The Physical Presence Test requires you to be physically present in a foreign country or countries for at least 330 full days during any 12-month period. These days don't have to be consecutive, and the 12-month period can begin on any day of the year. A "full day" is defined as 24 consecutive hours.

  • How do I choose between the Bona Fide Residence Test and the Physical Presence Test?

    The best test for you depends on your individual circumstances. The Bona Fide Residence Test offers more flexibility in terms of time spent in the U.S., while the Physical Presence Test is more straightforward and easier to meet, especially in the initial year of moving abroad. Choose the Bona Fide Residence Test if you plan to spend significant time in the U.S. but still maintain a residence abroad. Choose the Physical Presence Test if you plan to spend most of your time in a foreign country and want a more objective test.

  • What form do I need to file to claim the FEIE?

    You must file IRS Form 2555 with your U.S. tax return to claim the FEIE, regardless of which test (Bona Fide Residence or Physical Presence) you meet.

Last updated: Sept. 14, 2025