The United States is almost alone in taxing its citizens on worldwide income wherever they live. If you hold a US passport (or a green card), moving abroad does not end your US filing obligation — it just adds tools to avoid being taxed twice. The two main ones are the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC).
FEIE vs FTC at a glance
| Feature | FEIE (Form 2555) | Foreign Tax Credit (Form 1116) |
|---|---|---|
| What it does | Excludes foreign earned income from US tax | Credits foreign income tax against US tax |
| Income covered | Earned income only (salary, self-employment) | All income types (earned + passive) |
| 2025 limit | About USD 130,000 (indexed) | No fixed cap; limited to US tax on that income |
| Eligibility | Bona fide residence or 330-days physical presence | Any foreign income tax actually paid |
| Best when | You live in a low/no-tax country | You live in a higher-tax country |
Figures reflect the 2025 tax year (the FEIE limit is inflation-indexed annually). General information, not tax advice — confirm with a US cross-border tax professional and the IRS.
How the FEIE works
The FEIE lets a qualifying expat exclude roughly the first USD 130,000 (2025) of foreign earned income — wages and self-employment — from US tax. To qualify you must meet either the bona fide residence test (a full tax year resident abroad) or the physical presence test (330 full days abroad in any 12-month period). The catch: it covers earned income only. A foreign pension, dividends, capital gains and rental income are not excluded by the FEIE.
How the Foreign Tax Credit works
The FTC instead takes the income tax you paid to a foreign country and credits it dollar-for-dollar against your US tax on that same income. It applies to all income types, not just earned income, and any excess can often be carried forward. If you live somewhere with income tax at or above US levels — most of Western Europe, Canada, Australia — the FTC usually wipes out the US tax entirely.
Which to choose
- Low- or no-tax country (UAE, Monaco, territorial states): the FTC gives little because you paid little foreign tax, so the FEIE is the workhorse for earned income — but note your passive income above the exclusion is still US-taxable.
- Higher-tax country (Germany, France, the Nordics): the FTC typically eliminates US tax across all income types, and you avoid the FEIE’s restrictions.
- You cannot use both on the same income, and switching off the FEIE once elected can lock you out for five years.
Don’t forget social security and reporting
Income tax is only half the picture. Whether you owe US self-employment / social-security tax abroad depends on a totalization agreement — without one, you can pay into two systems. And US expats must still file information returns such as the FBAR and often FATCA Form 8938 for foreign accounts.
Map your income types against the FEIE and FTC, check whether your country has a US tax treaty and totalization agreement, and get advice — the rules are detailed and the penalties for missing filings are steep.