Quick Answer
The foreign tax credit lets US expats claim a dollar-for-dollar credit against US taxes for foreign income taxes paid, up to the US tax liability on that foreign income. For example, if you paid $8,000 in UK taxes on $80,000 income, you can credit up to $8,000 against your US tax bill, potentially reducing it to zero.
Best Answer
Sarah Chen, Payroll Tax Analyst
Best for Americans living abroad who pay income taxes to their country of residence
How the foreign tax credit prevents double taxation
The foreign tax credit (FTC) allows US expats to claim a dollar-for-dollar credit against their US tax liability for foreign income taxes paid. This prevents the same income from being taxed twice. The credit is limited to the lesser of: (1) foreign taxes actually paid, or (2) US tax liability on the foreign-source income.
Example: $80,000 salary in the UK
Let's say you're a US expat earning $80,000 working in London:
UK taxes paid: $18,500 (23% effective rate)
US tax calculation:
You paid $18,500 to the UK but can only credit $9,328 against US taxes. The excess $9,172 credit carries forward for up to 10 years.
Key factors that affect your credit
Foreign tax credit vs foreign earned income exclusion
You can choose between the foreign tax credit and the foreign earned income exclusion (FEIE), but not both for the same income. In 2026, the FEIE excludes up to $130,000 of foreign earned income from US taxation entirely.
Choose the credit when:
Choose the exclusion when:
What you should do
1. Track all foreign taxes paid - Keep receipts for income taxes withheld or paid directly
2. File Form 1116 - This calculates your foreign tax credit limitation
3. Consider both options - Run the numbers for FTC vs FEIE to see which saves more
4. Plan for carryovers - Unused credits can be valuable in future years
Use our [paycheck calculator](paycheck-calculator) to model your US tax liability and compare strategies.
Key takeaway: The foreign tax credit provides dollar-for-dollar relief up to your US tax on foreign income, but choosing between the credit and exclusion requires careful analysis of your specific tax rates and income mix.
*Sources: [IRS Publication 514](https://www.irs.gov/pub/irs-pdf/p514.pdf), [Form 1116 Instructions](https://www.irs.gov/pub/irs-pdf/i1116.pdf)*
Key Takeaway: The foreign tax credit provides dollar-for-dollar relief against US taxes for foreign income taxes paid, but is limited to your US tax liability on that foreign income.
Foreign Tax Credit vs Foreign Earned Income Exclusion comparison for different scenarios
| Scenario | Foreign Tax Credit | Foreign Earned Income Exclusion | Better Choice |
|---|---|---|---|
| $80K salary, 25% foreign tax rate | $0 US tax, $7K carryover | $0 US tax (within exclusion) | Exclusion (simpler) |
| $150K salary, 35% foreign tax rate | $0 US tax, $15K carryover | $3K US tax on $20K excess | Credit saves $3K |
| $100K salary + $30K investment, 30% foreign tax | $0 US tax, $8K carryover | $5K US tax on investment income | Credit saves $5K |
| $60K salary, 5% foreign tax rate | $8K US tax owed | $0 US tax (within exclusion) | Exclusion saves $8K |
More Perspectives
Marcus Rivera, Compensation & Benefits Analyst
Best for expats with substantial foreign investment income or high salaries exceeding FEIE limits
Why high earners usually prefer the foreign tax credit
For expats earning $150,000+, the foreign tax credit often provides better tax relief than the foreign earned income exclusion. Here's why:
Income above FEIE limits: The 2026 FEIE excludes only $130,000 of earned income. If you earn $200,000, you'll owe US tax on $70,000 regardless. The FTC can offset taxes on the entire amount.
Investment income: The FEIE only covers earned income (salary, self-employment). Investment income, bonuses, and stock compensation are always taxable in the US. The FTC can offset US taxes on foreign investment income.
Example: $180,000 salary + $20,000 investment income in Germany
German taxes paid: $75,000 (37.5% effective rate)
US tax calculation with FTC:
Compared to FEIE strategy:
The FTC saves an additional $8,500 in this scenario.
Advanced strategies for high earners
Key takeaway: High earners with income above $130,000 or significant investment income typically benefit more from the foreign tax credit than the foreign earned income exclusion, especially in high-tax countries.
Key Takeaway: High earners typically benefit more from the foreign tax credit than the foreign earned income exclusion, especially when earning above $130,000 or having significant investment income.
Sarah Chen, Payroll Tax Analyst
Best for digital nomads or remote workers who move frequently between countries
Special challenges for mobile remote workers
Remote workers who move frequently face unique foreign tax credit complications:
Tax residency issues: Each country has different rules for when you become tax resident. Some require payment even for short stays, while others have minimum day thresholds (usually 183 days).
Partial year credits: If you live in multiple countries during the tax year, you may have foreign tax credits from each country on different portions of your income.
Example: Digital nomad earning $90,000
January-June in Portugal: $45,000 income, $8,100 Portuguese tax (18% rate)
July-December in Thailand: $45,000 income, $0 Thai tax (no tax treaty, under threshold)
US tax calculation:
Key considerations for nomadic workers
The foreign tax credit can still provide significant relief, but requires more complex planning and documentation when you're mobile.
Key takeaway: Mobile remote workers can use the foreign tax credit but need careful tracking of tax residency in each country and may have credits from multiple jurisdictions in a single tax year.
Key Takeaway: Mobile remote workers can benefit from foreign tax credits but need careful tracking of tax residency and may have credits from multiple countries in one tax year.
Sources
- IRS Publication 514 — Foreign Tax Credit for Individuals
- Form 1116 Instructions — Foreign Tax Credit Calculation
- IRS Publication 54 — Tax Guide for US Citizens Abroad
Related Questions
Reviewed by Sarah Chen, Payroll Tax Analyst on February 28, 2026
This content is for educational purposes only and is not a substitute for professional tax advice. Consult a qualified tax professional for advice specific to your situation.