The US Foreign Tax Credit – A Complete Guide For Expats

Contrary to popular belief, American expats do not have to be stuck with a high US tax burden, when also paying high taxes in their residence country. The truth is, with the Foreign Tax Credit expats can often reduce or even eliminate their US tax.

This guide explains what the Foreign Tax Credit is and how US citizens abroad can benefit.

What is the Foreign Tax Credit?

The Foreign Tax Credit (FTC) is a dollar-for-dollar credit reduction of US tax for taxes paid to a foreign country on foreign-sourced income. Expats who pay eligible foreign taxes can use this credit regardless of whether there is a tax treaty or not.

Even better, the FTC can be used for several different types of foreign taxes (list in the next section).

Taxpayers claim the credit on Form 1116, which they file together with their tax return.

In some cases, you may use both the Foreign Tax Credit and the Foreign Earned Income Exclusion (FEIE) in the same year, as long as they apply to different income categories

How to claim a credit for foreign taxes

Many expats can claim the Foreign Tax Credit on their US tax return to offset taxes they paid in a foreign country. To qualify, they must meet basic requirements:

• The tax is imposed on you by a foreign country or US possession.
• The tax is an income tax (or a tax in lieu of an income tax).
• The tax is legally owed and actually paid or accrued.
• The income is foreign-sourced for US tax purposes.
• You are not using another provision (like FEIE) to exclude that same income.

You claim the credit primarily on Form 1116, broken out by income category (e.g., general category income, passive income). Some taxpayers with low amounts of foreign taxes may claim the FTC without Form 1116 under simplified rules, but expats usually file Form 1116.

What taxes qualify for the Foreign Tax Credit?

Americans can receive the Foreign Tax Credit for foreign taxes on the following:

• Income
• Wages
• Dividends
• Interest
• Royalties

The good news is that both employment and self-employment income can qualify.

However, some payments do not qualify, including:

• Taxes that are not based on income, such as many wealth taxes, property taxes, or some stamp duties
  Fines, penalties, and payments that are voluntary or not legally owed
• Most foreign social security contributions, unless they qualify as an income tax in lieu of a tax on income under specific rules

Important nuance: many foreign local or regional income taxes can qualify if they are income-based. The label matters less than whether the tax functions as an income tax.

In practice, income taxes paid to a foreign country or its political subdivisions (such as provinces, cantons, or cities) can qualify for the FTC, provided they meet IRS criteria as a tax on income.

Likewise, you cannot receive Foreign Tax Credits for wealth or net-worth taxes that are not based on income.

Should expats use the Foreign Tax Credit or the Foreign Earned Income Exclusion?

US expats often wonder whether the FEIE or the FTC is better. Choosing blindly can be expensive.

There are many factors to consider before choosing the FTC over the FEIE. Key considerations include:

• Your foreign tax rate vs US tax rate
• Your long-term plans (moving countries, returning to the US)
• Desire to contribute to IRAs or Roth IRAs
• Eligibility for the Child Tax Credit
• Type of income (salary vs passive vs self-employment)

You can use both the FEIE and the FTC, but not on the same dollar of income. When you exclude income under the FEIE, that portion is removed from your US taxable income, so you can’t claim the FTC on it.

In practice, there’s no one-size-fits-all answer, the best option depends on your situation:

• If you live in a high-tax country, the FTC usually provides greater long-term benefit because you can offset most or all of your US tax liability while keeping eligibility for credits such as the Child Tax Credit and IRA contributions.
• If you live in a low- or no-tax jurisdiction, the FEIE can reduce or eliminate tax on your earned income when there are few or no foreign taxes to claim.

A common mistake is using the FEIE automatically every year. Doing so can limit your ability to use or carry forward foreign tax credits later,  particularly if you move to a different country with higher taxes. It’s often best to model both options before filing.

Living in a high tax jurisdiction

Often, US Americans living in a high tax country pay higher taxes there than they would have paid in the US. Those expats typically benefit from using the FTC instead of the FEIE.

In this case:

• You use Form 1116 to claim a FTC for foreign income taxes.
• The credit reduces your US tax on that foreign income, often to zero.
• Any excess foreign tax may become a carryover (see below).

If your foreign effective tax rate is consistently higher than your US rate, the FTC is usually more powerful than FEIE and avoids locking yourself out of other benefits.

Self-employed expats or digital nomads may also face sourcing and limitation issues that make partial use of both the FTC and FEIE more effective.

Making a Roth or traditional IRA contribution

To contribute to an IRA, you need compensation (earned income) that is not excluded from US taxation.

If expats use the FEIE to exclude all their income from income tax, they do not have any un-excluded income left for IRA contributions. Since IRAs have tax advantages, you cannot use income excluded from taxation to make a contribution.

Income excluded under the FEIE does not count as earned income for IRA purposes. Income reported and offset by the FTC generally remains eligible.

So you might think that you should use the Foreign Tax Credit instead. However, you might still be able to contribute to an IRA when using the FEIE.

Claiming the FEIE does not preclude expats from making an IRA contribution as long as they have un-excluded income that they can use for the contribution.

For example, if an expat has foreign income that exceeds the FEIE limit, then he has non-excluded income and can contribute. Similarly, income that is not foreign-sourced, for example from working during a business trip in the US, cannot be excluded and therefore can be used for IRA contributions.

If your goal is to keep contributing to retirement savings while living abroad, relying primarily on the FTC can offer greater flexibility.

Claiming the Child Tax Credit

Eligible expats can use the Child Tax Credit and the Foreign Tax Credit together. This allows them to reduce their US tax burden even further.

In some cases, the Child Tax Credit can bring the tax bill to zero. Some even receive a refund from the IRS. In 2025, up to $1,700 of the Child Tax Credit is refundable, and the total credit is $2,200 per qualifying child.

However, the FEIE reduces taxable income, and income excluded under the FEIE doesn’t count for the Child Tax Credit.

Using the FTC instead can preserve eligibility for both the full and refundable portions of the credit, depending on income and residency status.

Foreign Tax Credit carryover to future years

The Foreign Tax Credit not only reduces current year income tax. It can also reduce a future taxes.

When you pay higher taxes abroad than you would have in the United States, the FTC can bring your current year US tax liability down to zero. You can then carry forward any unused credits for future years.

This is called a carryover (more on this below).

Expats can use these carryover credits later when they maybe move to a low tax jurisdiction (such as Hong Kong or the UAE). Thereby, they reduce their long-term tax obligations.

On the other hand, if the foreign tax rate is lower than the US tax rate, the Foreign Earned Income Exclusion might make more sense.

Keep detailed records of all carryovers by income category, losing this data when switching accountants or software is a common mistake.

Unused tax credit carryovers and carrybacks

As mentioned, carryovers and carrybacks can reduce the US expat tax burden beyond the current tax year.

It works like this:

When an expat pays more in income taxes to a foreign government than they would to the US government, the IRS lets them keep the extra foreign tax credits. Unused foreign tax credits do not result in a US tax refund.

Instead, expats can use the extra foreign tax credits later or apply them to the previous tax year.

US taxpayers can carry forward foreign tax credits for up to 10 years.

Or you might apply foreign tax credits to the previous tax year. This is referred to as a carryback. Carrybacks can only be applied to the prior tax year but not to earlier years.

If you have a Foreign Tax Credit carryover from previous years, remember to tell your accountant– especially if you are switching accountants. At Online Taxman, we review the last three years of tax returns for new clients to make sure nothing gets missed.

How to use the FTC

Let’s explain this with an example:

Jane is an American expat living in London. The United Kingdom is a high-tax jurisdiction. In the UK, Jane pays more income taxes than she would if she lived in the United States.

Jane’s accountant helps her claim the FTC on Form 1116. For each dollar of income tax she pays to the UK, she receives a dollar foreign tax credit.

The foreign tax credit is applied to her US tax burden. Since Jane paid more in the UK than she would have in the US, her US tax is zero.

Jane is planning to move in the next few years to a low-tax country. There, she can carry over the unused foreign tax credits to reduce her US taxes while still paying less in foreign taxes.

Common Questions About the Foreign Tax Credit for Expats

How do I claim the Foreign Tax Credit?

You claim it on Form 1116, filed with your annual US tax return. You must report the foreign income, taxes paid or accrued, and categorize income correctly (e.g., general, passive).

Do I need a tax treaty to use the FTC?

No. The FTC applies even if there’s no tax treaty between the US and your country of residence.

Can I use both the Foreign Earned Income Exclusion (FEIE) and the FTC?

Yes, but not on the same income. Many expats use the FEIE for part of their income and the FTC for the rest.

How much foreign tax can I credit?

You can claim a credit up to the amount of US tax owed on the same foreign income. Excess credits can’t create a refund but can be carried to other years.

What happens to unused Foreign Tax Credits?

You can carry them back one year and forward up to ten years to offset US tax in those periods.

Can the FTC eliminate all my US taxes?

In many high-tax countries, yes. If your foreign taxes exceed your US liability, your US tax on that income can be reduced to zero.

Does the FTC help with state taxes?

No. The FTC applies only to federal income taxes. States generally do not allow foreign tax credits.

Can I combine the FTC with the Child Tax Credit?

Yes. Using the FTC instead of full FEIE can help you keep enough taxable income to qualify for the Child Tax Credit and potentially receive a refund

Should you choose the Foreign Tax Credit?

The Foreign Tax Credit has many advantages. That does not mean it’s the right choice for everybody.

In fact, in some cases, expats could lose money with the Foreign Tax Credit. Sometimes, the Foreign Earned Income Exclusion is a better choice.

A careful analysis of each expat’s unique tax situation and long-term plan is crucial.

The right strategy is rarely “FEIE vs FTC” in isolation. It is about your full income picture, your host country, your long-term plans, and how these tools interact over multiple years.

If your situation involves multiple countries or income types, it’s worth consulting an expat tax professional to ensure the credit is applied correctly and your future benefits are preserved.

Our team of expert expat accountants is happy to walk through these life and tax decisions with you. Set up a one-on-one consultation with one of our accountants below.