Last reviewed: September 5, 2026
| Feature | Foreign Earned Income Exclusion | Foreign tax credit |
|---|---|---|
| Basic effect | Excludes qualifying foreign earned income up to a limit | Credits qualifying foreign income taxes against U.S. tax, subject to limits |
| Presence/residence test | Required, along with foreign tax home | Not the same FEIE requirement |
| Income covered | Foreign earned income | Foreign-source income with qualifying tax, grouped by category |
| Foreign tax paid | Not required to create the exclusion | Required or accrued under applicable rules |
| Unused amount | No carryover of unused annual exclusion | Excess credits may carry back or forward, subject to rules |
| Main form | Form 2555 | Form 1116 for individuals, in many cases |
FEIE may deserve attention when
- Foreign earned income is within the available exclusion and foreign income tax is low.
- The taxpayer clearly satisfies a qualifying test and foreign tax-home requirement.
- The housing amount may add a meaningful benefit.
- The broader return consequences have been compared.
The credit may deserve attention when
- The taxpayer paid substantial foreign income tax in a higher-tax country.
- Foreign tax credit carryovers may matter over multiple years.
- Family credits or other return interactions make exclusion less attractive.
- Income exceeds the FEIE limit or includes categories outside foreign earned income.
You cannot claim both on the same excluded income
A foreign tax credit or deduction is not allowed for foreign tax on income excluded under FEIE or the foreign housing exclusion, or on income you could have excluded. A return can sometimes use FEIE for one portion of income and a credit for another, but the allocation rules must prevent double benefit.
Revoking an FEIE election can limit the ability to elect it again for the next five tax years without IRS consent. The choice should be evaluated beyond a one-year estimate.
Questions a real comparison should answer
- What is the foreign effective tax rate?
- How much income is actually foreign earned income?
- Is the full FEIE available or prorated?
- Are there foreign tax credit carryovers?
- How do child and other credits interact?
- What happens if income rises next year?
- Does either path affect state tax differently?
- Is self-employment tax still part of the picture?
Related resources
General educational information only. The comparison depends on complete income, foreign tax, family, residency, and filing facts.