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Foreign Tax Credit Explained for U.S. Expats

The Foreign Tax Credit, often called FTC, allows some U.S. taxpayers to reduce U.S. tax by claiming a credit for qualifying income taxes paid or accrued to another country.

This can help prevent double taxation, especially for Americans abroad who live in countries where they already pay significant foreign income tax.

How the Foreign Tax Credit Works

The Foreign Tax Credit does not exclude income the way the Foreign Earned Income Exclusion does. Instead, it may reduce your U.S. tax based on foreign income taxes paid or accrued.

In plain English: FEIE may remove qualifying foreign earned income from regular U.S. income tax up to the allowed limit. FTC may reduce U.S. tax by giving credit for qualifying foreign taxes already paid.

The Foreign Tax Credit is generally claimed using Form 1116.

Who Should Consider the Foreign Tax Credit?

The Foreign Tax Credit may be especially important for expats who pay income tax in another country.

Expats living in moderate-tax or high-tax countries
People who pay significant foreign income tax
Expats whose income is above the FEIE limit
People with income that does not qualify for FEIE
Taxpayers who may want to preserve unused foreign tax credits for future years

Key Advantages of the Foreign Tax Credit

May reduce U.S. tax on income that was already taxed by another country
Can be useful in higher-tax countries
May apply to more types of income than FEIE, depending on the facts
Unused credits may sometimes carry to other tax years

Important Considerations

The Foreign Tax Credit can be more complex to calculate than FEIE because it depends on the type of foreign tax paid, the category of income, timing, documentation, and limitations on how much credit can be used.

You usually need good records showing foreign income, foreign taxes paid or accrued, the tax year involved, and the currency conversion used.

If you are comparing different tax strategies, read FEIE vs FTC before deciding which path fits your situation.

FTC vs FEIE

The Foreign Tax Credit and Foreign Earned Income Exclusion are two different tools. One is not automatically better than the other.

FEIE may be useful for qualifying earned income, especially in low-tax or no-tax countries. FTC may be more useful when you pay significant income tax to another country.

This choice can affect your filing strategy, especially if your income, country of residence, or foreign tax situation changes later.

Foreign Accounts Are a Separate Issue

The Foreign Tax Credit helps with income tax. It does not replace foreign account reporting rules.

If you have foreign financial accounts, you may also need to review FBAR Requirements and Form 8938 Guide.

What Should You Do Next?

If you pay taxes in another country, gather your foreign tax records before choosing between FEIE and FTC.

Next Step: Compare FEIE and FTC

Before choosing a filing strategy, compare whether FEIE, the Foreign Tax Credit, or a combination of filing rules may fit your income, foreign taxes, and country of residence.

Compare FEIE vs FTC →