FEIE vs Foreign Tax Credit Calculator

The FEIE (Form 2555) excludes qualifying foreign earned income from US taxable income, up to an annual inflation-adjusted limit ($126,500 for 2024). The FTC (Form 1116) instead credits foreign taxes paid against your US tax liability on a dollar-for-dollar basis. Both prevent double taxation but through different mechanisms — exclusion vs credit.

US citizens and residents who live abroad and pass either the Physical Presence Test (330+ full days outside the US in any 12-month period) or the Bona Fide Residence Test (you have established a permanent foreign residence and the IRS recognises you as a bona fide resident of that country). Both tests have nuances; most expats in the UK qualify via one or both.

UK income tax rates — 20% basic rate, 40% higher rate, 45% additional rate — exceed the equivalent US marginal rates on the same income levels. Because the FTC provides a dollar-for-dollar reduction in US tax equal to UK tax paid, it typically reduces US tax liability to zero entirely, often generating excess credits. FEIE provides only an exclusion, which is less efficient when foreign tax rates exceed US rates.

FEIE tends to be more advantageous in low-tax or zero-tax jurisdictions such as the UAE, Cayman Islands, Bahrain, or Saudi Arabia, where there is little or no foreign income tax to credit. In these cases, the FEIE's direct exclusion of income from US taxable income provides meaningful relief that the FTC cannot replicate (there are no foreign taxes to credit).

Yes, but with an important restriction: if you have previously elected FEIE and later revoke it, you cannot re-elect the FEIE for 5 tax years without IRS consent. Switching from FTC to FEIE is generally unrestricted. Given this asymmetry, the initial election choice is important and should be made with professional guidance.

No. Self-employment tax (15.3% on net SE income up to the Social Security wage base) applies regardless of the FEIE election. The FTC does not offset SE tax either, as it is not an income tax. The US-UK Totalization Agreement may provide relief for some self-employed individuals — consult a specialist to understand your position.

The FEIE only covers foreign earned income: wages, salaries, and net self-employment income earned from services performed while abroad. It does not cover passive income (interest, dividends, capital gains, rental income), pension income, alimony, or income paid by the US government. All of these remain fully subject to US tax, though the FTC may offset the liability.

$126,500 for 2024; $130,000 for 2025; $132,900 projected for 2026 (subject to IRS announcement — the 2026 figure is an estimate based on inflation indexing). The limit is adjusted annually for inflation under IRC Section 911(b)(2)(D).