FEIE or Foreign Tax Credit: which method protects your salary

If you are a US citizen or green card holder working in Europe, you pay income tax on your salary there and still have to report it on your US tax return. So that the same salary is not taxed twice in full, US law offers two methods: the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). Both can bring the US tax on your salary down to zero. But they work differently, they have different side effects, and one of them locks you in once you give it up. This page explains both, shows what they cost and which questions decide the choice. Why you file a US return at all is covered in our guide US tax obligations for Americans living in Europe.

1Two ways around the same double tax

The FEIE works on your income. With Form 2555 you take your foreign earned income, up to a cap, out of your US income. Whatever is excluded is not taxed in the US, no matter how much tax you paid on it in Europe.

The FTC works on the tax. With Form 1116 you credit the income tax you paid or owe in your European country of residence against your US tax. Your salary stays in your US income; the US tax on it is reduced by the foreign tax, but only up to the share of US tax that falls on your foreign income.

For the same income you get one or the other, never both. The law disallows any deduction or credit to the extent it relates to excluded income. The instructions for Form 1116 put this into practice: you reduce your creditable foreign tax by the part that relates to the salary excluded on Form 2555. You can still combine the methods, just for different income. If you exclude your salary, you can still claim a credit for foreign tax on interest and dividends, because that income is not excluded.

2The FEIE: requirements and amounts

The FEIE has two requirements. First, your tax home must be abroad. Second, you must pass one of two tests:

• Bona fide residence test: you are a genuine resident of a foreign country for an uninterrupted period that includes a full tax year. If you live permanently in a European country, you can meet this test from your first full calendar year there.
• Physical presence test: you are abroad for at least 330 full days within a period of twelve consecutive months. The days do not have to be consecutive. The test depends only on the number of days, not on the kind of residence you have; it is most useful in the year you move.

Only earned income can be excluded: salary, wages, bonuses and self-employment profit for work you do abroad. The law expressly leaves out amounts paid as a pension or annuity, payments by the US government to its employees, and amounts paid after the end of the year following the year of the work. Interest, dividends, rent and capital gains are not earned income. So the FEIE does not help with a European state pension; more on that under pensions across the Atlantic.

The cap applies per person and is adjusted for inflation every year. For 2025 it was $130,000; for tax years from 2026 it is $132,900. On top of that comes the foreign housing exclusion: the part of your housing costs above a base amount of 16 percent of the cap can also be excluded, up to a limit. In most places that limit is 30 percent of the cap, so $39,000 for 2025; for expensive locations the IRS publishes higher limits.

If you have not yet reached the days for the test in your first year abroad, you can use Form 2350 to request an extension of the filing deadline until 30 days after the date you expect to meet the requirements. That way you file only once, already with the FEIE.

3What the FEIE costs you

The FEIE looks simple: salary out, tax zero. Its costs show up elsewhere.

Your other income gets more expensive. If you have other income besides the excluded salary, such as salary above the cap, investment income or rent, the tax on it is calculated at the rate that would have applied without the FEIE. In effect, the law stacks the excluded income underneath everything else: the rest does not start in the lowest bracket but where the excluded salary ends.

No credit for tax on the excluded salary. The foreign tax on the excluded salary is lost for US purposes. It can neither be credited nor carried forward.

No Additional Child Tax Credit. If you use the FEIE or the housing exclusion in a year, you cannot claim the Additional Child Tax Credit in that same year, which is the part of the child credit that is paid out even when you owe no US tax. For families this can tip the balance. How local child benefits and the Child Tax Credit interact is explained under Child benefits and the Child Tax Credit.

No IRA contributions from excluded salary. Contributions to a traditional or Roth IRA require compensation that is included in income. Excluded salary does not count.

No help with Self-Employment Tax. If you are self-employed, all your income counts toward the US social security tax, including what you excluded from income tax with the FEIE. Whether this tax applies at all depends on the social security agreements the IRS describes in Publication 54.

The lock-in. Once you choose the FEIE, the choice applies to that year and every following year until you revoke it. If you revoke it, you cannot choose it again without IRS consent until the sixth tax year after the revocation. A revocation can also happen by accident. According to Publication 54, if you claim the Foreign Tax Credit, the Additional Child Tax Credit or the Earned Income Credit for income you could have excluded, the FEIE is treated as revoked for that year. To get consent for an earlier return, you request a private letter ruling from the IRS.

4The Foreign Tax Credit

With the Foreign Tax Credit your salary stays in your US income, and the US tax on it is reduced by the foreign income tax. What you can credit is the tax you legally owe and actually pay, not necessarily the amount withheld. If you get part of the withheld tax back through your tax return in Europe, only the final amount owed counts.

The credit has a limit. It cannot exceed the share of your US tax that corresponds to the ratio of your foreign income to your total taxable income. You calculate the limit separately by category. For Americans in Europe two usually matter: the general category, which includes your salary, and the passive category for interest, dividends and similar income. So high tax on your salary does not help against US tax on investment income, and vice versa.

Whatever you cannot credit in a year because of the limit is not lost. The law lets you carry it back one year and forward ten years, each time within the same category. Instead of the credit, you can also deduct foreign income tax, but only for all foreign income taxes of a year together. The IRS considers the credit more favorable in most cases. You can switch to the credit within ten years from the regular filing deadline for the year in which the tax was paid.

There is a shortcut for small amounts: if your only foreign income is passive income reported on a statement and your creditable tax is no more than $300 ($600 on a joint return), you can claim the credit without Form 1116 and without the limit calculation. In that case no carryback or carryforward is allowed for that year.

5Your salary in Europe

Which method suits you comes down mainly to how two numbers compare: the income tax you pay on your salary in Europe, and the US tax that would be due on that same salary without any relief.

If the European tax on your salary is lower than the US tax, for example because of low local rates, the FEIE can come out ahead, as long as your salary stays below the cap. Above it, things get complicated: the rest is taxed at the stacked rate, and you need the credit for that part again.

Then there are the questions from the section on the cost of the FEIE: do you have children who might qualify for the Additional Child Tax Credit? Do you want to contribute to an IRA? Do you have investment income that stacking would push into a higher bracket? No rule of thumb answers these. The answer comes from running both options with your own numbers.

6The treaty layer

For the choice between FEIE and FTC, this means the treaty does not replace either method. It helps determine how much European tax is due on which income in the first place, and so what the Foreign Tax Credit can offset.

7Plan before you switch

Because the FEIE is locked for five years once you revoke it, it pays to make the choice with more than the current year in mind. If you pick the FEIE today with a salary below the cap and want to switch to the Foreign Tax Credit in three years because of a raise, a child or a move, be aware that the way back will then be closed for longer. Switching the other way, from the Foreign Tax Credit to the FEIE, triggers no lockout, as long as you had not revoked the FEIE before.

If you are catching up on years without a US return, you choose the method again for each of those years. Under the Streamlined Procedure: catching up on US taxes without penalties, Form 2555 or Form 1116 therefore belongs with each of the three returns. And whichever method you use, reporting your accounts in Europe remains a separate obligation: the FBAR filing. The deadlines for your return, Form 2350 and the FBAR are in the deadline calendar for Americans abroad.

In short

• There are two ways to avoid double taxation of your salary: the Foreign Earned Income Exclusion removes earned income up to $132,900 (2026) from US tax, and the Foreign Tax Credit offsets the income tax you paid in Europe.
• You can only use one of them for the same income; no foreign tax can be credited against excluded salary.
• The FEIE has side effects: a higher tax rate on the rest, no Additional Child Tax Credit in the same year, no IRA contributions from excluded salary, and a five-year lockout after revoking it.
• The Foreign Tax Credit is capped at the share of US tax attributable to your foreign income; unused tax can be carried back one year and forward ten.
• The only way to know which method fits is to run both with your own numbers.

How we help you

• US taxes for US citizens abroadForm 1040, FBAR and Streamlined for US citizens living in Europe.
• US Tax ConsultationYour US tax question, answered by people who know both sides.
• Streamlined FilingCatch up on missed US tax returns and FBARs through the Streamlined procedure.