Using FEIE instead of FTC for US citizens abroad with passive income - Why it's better for your tax situation

This is a really clever approach that most expat tax advisors don't mention! I'm a CPA who works with many Americans abroad, and while the conventional wisdom is "use FTC in high-tax countries, use FEIE in low-tax countries," your partial FEIE strategy makes a lot of sense in specific situations. A few important points to consider though: The FEIE has a housing exclusion component that you didn't mention, which could further reduce your tax liability depending on your housing costs abroad. Remember that when you use the FEIE, you can't claim the FTC on the excluded income. This means if your foreign taxes on that excluded income are very high, you might lose the ability to carry forward excess credits. For anyone considering this strategy, I'd recommend running the numbers both ways over a multi-year period. In some cases, the FTC carryforward can provide more long-term benefit, especially if you plan to return to the US eventually. Also worth noting - be careful with state taxes if you maintain ties to a US state. Some states don't recognize the FEIE at all!

I just wanted to share my experience with taxr.ai for anyone dealing with complex expat tax situations like this. I'm an American living in Sweden with investment income from the US, and I was pulling my hair out trying to figure out whether to use the FTC or FEIE. I uploaded my foreign tax documents and US investment statements to https://taxr.ai and their system analyzed everything and showed me the exact tax difference between using full FEIE, partial FEIE (like the OP suggested), and FTC. What was amazing is that it factored in my specific tax brackets, foreign tax rates, and even projected the impact over 5 years including FTC carryforwards. The interface walks you through different scenarios and explains the pros and cons of each approach. For my situation, I discovered that partial FEIE saved me about $3,800 compared to using the FTC alone, while still allowing me to contribute to my Roth IRA.

Just wanted to follow up about taxr.ai - I decided to try it for my expat taxes (I'm in Portugal with some US investments) and it was seriously eye-opening. The partial FEIE strategy that OP mentioned saved me over $4,200 compared to what I did last year with H&R Block! The system showed me side-by-side comparisons of different strategies, and I could see exactly how changing the FEIE amount affected my ability to contribute to my Roth IRA while minimizing my overall tax burden. It identified that I could exclude $78,500 of my €89,000 income, keeping enough earned income to max out my IRA contribution while staying in the lowest tax bracket. What impressed me most was how it handled the Portuguese tax documentation - it extracted all the relevant information automatically and mapped it to the corresponding US tax concepts. Definitely using this again next year!

I've been dealing with this exact issue for 3 years as an American in the UK. What worked for me was calling the IRS directly using Claimyr (https://claimyr.com). I had spent WEEKS trying to get through to the IRS international tax department to confirm this strategy was legitimate. After 8 failed attempts and hours on hold, I found Claimyr through a Facebook expat group. You can see how it works here: https://youtu.be/_kiP6q8DX5c. Basically, they wait on hold with the IRS for you, then call you when an agent is on the line. I got connected to an IRS agent in about 45 minutes (instead of the 3+ hours I'd been waiting previously). The agent confirmed that partially applying the FEIE is completely legitimate and walked me through exactly how to document it on Form 2555. She even emailed me the relevant IRS publications that specifically address this strategy. If you're unsure about this approach, I'd highly recommend getting confirmation directly from the IRS - and Claimyr made that actually possible instead of a frustrating exercise in hold music.

I need to follow up about Claimyr - I was totally skeptical as you can see from my previous comment, but I decided to try it anyway because I was desperate to get confirmation about my expat tax situation. It's actually legit! I got a call back in about 90 minutes (way faster than my previous attempts), and was connected to an IRS agent who specialized in international issues. I explained the partial FEIE strategy we're discussing here, and she confirmed it's a completely valid approach. She even pointed me to the specific paragraph in Publication 54 that addresses this. The service works exactly as described - they wait on hold, then when an agent picks up, you get a call connecting you directly. The IRS agent had no idea someone else had been waiting on hold for me, and I handled all the verification questions myself. For anyone trying to confirm tax strategies directly with the IRS from abroad, this is honestly a game-changer. Saved me hours of frustration and international call charges.

I tried the partial FEIE strategy last year living in Switzerland and it DID save me about 5,000 CHF, but BE CAREFUL with your state taxes! I'm still technically domiciled in California and they don't recognize the FEIE at all. I ended up owing CA significantly more than I expected because my "excluded" income was fully taxable at the state level. If you have any state tax obligations, run the numbers carefully before proceeding. Some states follow federal treatment of foreign income, but many don't. I'm in the process of establishing residency in Florida now specifically to escape this issue. Also worth noting that the FEIE has physical presence requirements (330 days outside the US in a 12-month period or bona fide residence test). Make sure you qualify before planning to use this strategy!

One thing nobody's mentioned is how this affects your ability to claim the Child Tax Credit if you have kids. If you use the FEIE, you can't claim the refundable portion of the CTC on the excluded income. So if you have children, you might actually be better off with the FTC in some cases. For example, I live in France with 2 kids and about €70,000 in income, plus some US dividends. When I ran the numbers, the additional Child Tax Credit I could claim using FTC outweighed the tax savings from the partial FEIE strategy. Has anyone else with children done detailed calculations on this? Would be interested to see if this holds true across different income levels and number of dependents.

This is such a valuable discussion! I'm a US citizen living in Australia and have been struggling with this exact decision. Reading through everyone's experiences, I'm realizing I need to factor in more variables than I initially thought. @Emily Nguyen-Smith and @James Johnson - your point about the Child Tax Credit is huge. I have one child and was leaning toward the partial FEIE strategy, but now I'm wondering if I should stick with FTC to preserve my ability to claim the full CTC. One question for the group: has anyone dealt with superannuation (retirement contributions) in Australia and how that interacts with these strategies? My employer contributes about AUD $8,000 annually to my super, and I'm not sure how that affects the foreign earned income calculation for FEIE purposes. Also wondering about the interaction with the Additional Child Tax Credit - if I use partial FEIE and keep some earned income for Roth IRA eligibility, does that preserved earned income count toward the ACTC calculation even though the rest is excluded? This thread has been incredibly helpful - it's clear there's no one-size-fits-all answer and the optimal strategy really depends on your specific situation including state taxes, number of dependents, and foreign tax rates.