Income Earned Abroad

A US citizen or green-card holder is taxed on worldwide income, regardless of where it is earned or where it is taxed locally. Two distinct provisions address the double-taxation problem: the foreign earned income exclusion (FEIE) under IRC §911, “Citizens or residents of the United States living abroad”, and the foreign tax credit (FTC) under IRC §901, “Taxes of foreign countries and of possessions of the United States”. They solve different problems, and the choice between them is often the largest single tax decision for a US expatriate.

The exclusion. The FEIE excludes a slice of foreign earned income from US taxable income: $132,900 for 2026 (annually inflation-indexed). To qualify, you must have a foreign tax home and either spend 330 full days of any 12-month period outside the United States (the “physical presence” test) or be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. Housing costs above a base amount are separately excludable under the housing exclusion or deduction (capped, with city-specific high-cost adjustments published annually). The exclusion applies only to earned income — wages, self-employment — and not to investment income, pensions, or capital gains. Above the exclusion ceiling, you are back to ordinary US brackets on the excess.

The credit. The FTC instead lets you credit foreign income tax paid against the US tax on the same income, dollar for dollar up to the US tax that would otherwise apply. The credit covers all categories of income, not just earned. Excess credit can be carried back one year and forward ten. Filed on Form 1116, “Foreign Tax Credit (Individual, Estate, or Trust)” for individuals.

Choosing. The decision is mechanical once you know your facts:

• If your foreign country has a higher effective tax rate than the US (most of Western Europe, Canada, Australia, Japan), the FTC fully covers your US liability and the FEIE saves nothing while introducing complexity. Take the credit.
• If your foreign country has a lower effective tax rate or none (the Gulf states, Singapore for non-domiciled residents, parts of Eastern Europe), the FEIE is the only meaningful shelter. Take the exclusion — and consider whether to elect into a partial-year FEIE plus FTC mix on the residual income above the exclusion cap.
• The two cannot be stacked on the same dollar of income, but they can be split across categories: FEIE on earned income up to the cap, FTC on investment income and on earned income above the cap. The interaction with the housing exclusion, with self-employment tax (which the FEIE does not reduce — you still owe US SE tax on the excluded income unless a totalization agreement applies), and with state residency (section “Domicile and the Conversion Year”) turns the calculation into a multi-page spreadsheet for any substantial expatriate income.

A US citizen abroad files Form 1040 every year regardless of how little US-source income they have, and must also file FinCEN Form 114 (FBAR) for foreign accounts aggregating over $10,000 at any point during the year, and Form 8938, “Statement of Specified Foreign Financial Assets” for larger holdings under Foreign Account Tax Compliance Act (FATCA). The reporting is independent of any tax owed; the penalty for failing to file FBAR runs $10,000 per non-willful account per year, and far higher for willful violations. Citizenship renunciation ( IRC §877A, “Tax responsibilities of expatriation”) is the only complete exit, and it carries a mark-to-market exit tax on net worth above $2 million.