Foreign Income Exclusion vs Foreign Tax Credit: Which is better for expat tax filing?

The Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC) have different benefits depending on your situation. FEIE pros: Excludes up to $120,000 (for 2025) of foreign earned income from US taxation. It's straightforward if you earn under the limit. Cons: Doesn't help with investment income, and you lose access to certain tax benefits tied to earned income (like IRA contributions based on excluded income). FTC pros: Dollar-for-dollar reduction of US taxes, can carry forward unused credits for 10 years, and works for all types of income. Cons: More complex calculations and paperwork. You cannot claim both on the same income, but you could use FEIE for earned income and FTC for investment income. Regarding switching: You can switch from FTC to FEIE anytime, but once you choose FEIE and then revoke it, you cannot claim FEIE again for 5 years without IRS approval. For your unused credits from 2023 - yes, you can still use them! FTC carryovers have a 10-year lifespan, so those excess credits from 2023 can be applied to any US tax liability through 2033, even in years where you used FEIE for your current income.

After spending hours trying to figure out my expat taxes last year, I stumbled across taxr.ai (https://taxr.ai) and it completely changed my approach to handling my foreign income. I was bouncing between FEIE and FTC calculations trying to figure out which would be better based on my situation in Germany. The tool analyzed all my German tax documents and income sources, then showed me exactly how much I'd save using FTC versus FEIE based on my specific circumstances. Turns out I was leaving about $3,700 on the table by using the exclusion when the credit would have been better for my situation with the German tax system. It also explained exactly how the carryover credits would work in future years if I generated excess credits, which was super helpful for planning purposes.

Just wanted to follow up about my experience with taxr.ai after trying it with my Japanese tax documents. It actually worked amazingly well! I uploaded my 源泉徴収票 (withholding tax slip) and other Japanese tax documents, and it extracted all the relevant information correctly. The analysis showed me that FTC was much better for my situation than FEIE since Japan's tax rates are higher than US rates in my income bracket. The tool estimated I'd save about ¥320,000 (roughly $2,100) using FTC instead of FEIE. What I found most valuable was seeing the 10-year projection of how my excess credits could be used in future years if I move back to the US. Really helped with my long-term planning since I'm considering returning in 2027.

For anyone struggling to get answers from the IRS about foreign income questions, I tried Claimyr (https://claimyr.com) after waiting on hold with the IRS international tax line for over 2 hours and getting disconnected. You can see how it works here: https://youtu.be/_kiP6q8DX5c They got me connected to an actual IRS agent in about 15 minutes, and I was able to ask specifically about my situation with switching between FTC and FEIE after returning to the US. The agent confirmed that my excess FTC from previous years was still valid for carryforward even though I had switched to FEIE for one year. Saved me from making a potentially expensive mistake on my return, since my tax software wasn't clear about how to handle this specific situation.

I need to eat my words about Claimyr. After my skeptical comment, I decided to try it myself since I had some complicated questions about my foreign rental property income that I couldn't get answers for anywhere online. It actually worked exactly as advertised. I was connected with an IRS agent in about 20 minutes (I timed it). The agent walked me through how to properly report my foreign rental income and confirmed that I could indeed use my carryover FTC from previous years even though I'd switched to FEIE for my employment income. What impressed me most was that I got connected to someone in the international tax department who actually understood expat issues. Previously when I managed to get through to the IRS on my own, I'd get general agents who weren't familiar with Form 2555 or Form 1116 complexities.

Former tax preparer here. One thing nobody's mentioned yet is that the choice between FEIE and FTC often depends on the specific country you're in and whether there's a tax treaty with the US. For example, if you're in a country with lower tax rates than the US (like UAE or Singapore), FEIE usually benefits you more because you're excluding income that would otherwise be taxed at higher US rates. Conversely, in high-tax countries like France or Sweden, FTC typically works better because you get credit for those higher taxes paid. The revocation period is another big consideration - that 5-year lockout after revoking FEIE can really cause problems if your situation changes.

Has anyone had experience with the Foreign Housing Exclusion/Deduction that goes along with FEIE? I'm moving to London next month and I hear housing costs are insane there. Wondering if this additional exclusion makes FEIE better than FTC in high-cost cities?

Great question! I went through this exact same decision process when I moved back to the US after working in the UK for several years. One key point that hasn't been fully addressed: you mentioned having $13,500 in excess FTC from 2023 - those credits are gold! Since FTC carryovers last 10 years, you can absolutely use them on your 2025 return even though you used FEIE in 2024. This might actually make your decision easier since you'll get immediate benefit from those carried-forward credits. A few additional considerations for your situation: - If you're planning to stay in the US long-term, FTC might make more sense going forward since you won't qualify for FEIE as a US resident - State taxes: some states don't recognize FEIE but do recognize FTC, so if you're in a state with income tax, this could affect your calculation - Alternative Minimum Tax (AMT): FTC can sometimes trigger AMT issues, while FEIE generally doesn't Since you're back in the US for 2025, you probably won't have foreign earned income anyway, so the FEIE vs FTC decision might be moot for this year. Focus on maximizing the use of those carryover credits from 2023! The switching rules are exactly as others described - you can go from FTC to FEIE anytime, but once you revoke FEIE, there's that 5-year waiting period.