FTC vs. FEIE: What’s best for a US ex-pat?

Get a Free Quote

Blog

June 18, 2023

FTC vs. FEIE: What’s best for a US ex-pat?

Life as a US ex-pat is an adventure. You get to experience diverse cultures, make new friends, and explore breathtaking landscapes. But amidst the excitement, there’s one task that might seem like a mountain to climb – filing your US tax returns.

Fear not because this guide is here to break down complex tax terms into digestible nuggets of information. Today, we’ll delve into the two significant tax relief mechanisms: the Foreign Tax Credit (FTC) and the Foreign Earned Income Exclusion (FEIE). By the end of this guide, you’ll know which one suits you best.

A Tale of Two Tax Reliefs: FTC vs. FEIE

As a US citizen abroad, you’re often presented with two powerful tax tools: FTC and FEIE. Although they serve the same purpose – easing your tax liability, the way they work is entirely different. Let’s break them down for better understanding:

Foreign Tax Credit (FTC) vs. Foreign Earned Income Exclusion (FEIE)

Here’s a quick comparison between the two

Choosing the Best Tax Tool: FTC or FEIE?

In most cases, the decision between FTC and FEIE comes down to your unique financial situation and living conditions. Let’s consider the following scenarios:

Consider FTC when:

You earn both active and passive income.
The tax you pay in your resident country is higher than the US tax.
You have dependents qualifying for the Child Tax Credit.
You’re planning to contribute to an IRA.

Consider FEIE when:

You do not pay any foreign income tax.
The foreign tax is lower than the US tax.
You have an income-driven repayment plan for US federal student loans.

A Case Study: John Doe's Tax Story

To make things clearer, let’s visualize these tools in action with the help of a fictional US ex-pat named John Doe. John is an independent contractor residing in Bali, earning $60,000 per year, and he’s paid $10,000 in taxes to Indonesia.

With the FTC, John can claim a $10,000 credit on his US tax return, directly reducing his US tax bill. This credit can cancel out his entire US tax bill, provided the US tax related to his income is $10,000 or more.

On the other hand, if he opts for the FEIE, he could exclude his entire income of $60,000 from US taxes since it falls below the 2022 threshold of $112,000. This method could lead to a $0 US tax bill for John, even without paying a cent to the US government.
For John, both FTC and FEIE could work, but each choice comes with its benefits and limitations. His choice would depend on multiple factors, such as his future income, his financial plans, and his travel plans to the US.

Finding the Right Guidance

Navigating the complex US tax laws might seem overwhelming, but it doesn’t have to be. Remember, when it comes to taxation, knowledge is power. The more you understand about FTC and FEIE, the easier your tax filing journey will become.

And with tax return filing and accounting services from experts like CROWNGLOBE, navigating these challenges is even easier. For more information, feel free to reach out.