How do the Foreign Tax Credit (FTC) and Foreign-Earned Income Exclusion (FEIE) differ?

What is the Foreign-Earned Income Exclusion (FEIE)?

The FEIE allows US expats to exclude a certain amount of foreign-earned income from US taxes. For 2024, this limit is $126,500. To qualify, you must:

  • Live outside the US for at least 330 days in a 12-month period.
  • Establish residency in a foreign country.
  • Earn foreign income.

You can also deduct housing expenses, which vary based on your location in the UAE.

What is the Foreign Tax Credit (FTC)?

The FTC helps US expats avoid double taxation by crediting foreign income taxes paid against their US tax liability. For example, taxes paid in Germany can offset US taxes. Unused credits can be carried forward for up to 10 years.

How do I choose between FEIE and FTC?

  • UAE Residents: FEIE is often more beneficial since there’s no income tax in the UAE.
  • Taxed Countries: In countries with income tax, like Germany, the FTC may be more advantageous due to the carry-forward option.

What should I remember about FEIE and FTC?

  • Understand Your Options: Learn about both FEIE and FTC to decide which suits your situation.
  • Location-Specific Rules: Housing deductions under the FEIE vary by location.
  • Seek Professional Advice: Consulting a tax professional can help maximize your tax benefits and ensure compliance.

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