Yes and no.
No — you cannot claim both on the same income. If you exclude income using Form 2555, you cannot also claim a credit for foreign taxes paid on that same income.
Yes — you can use the Foreign Earned Income Exclusion (FEIE) for part of your income and the Foreign Tax Credit (FTC) for other income, as long as you don't "double‑dip" on the same dollars.
U.S. taxpayers working abroad often want to reduce or avoid being taxed twice — once by the foreign country and again by the IRS. Two major tools help accomplish this:
- Foreign Earned Income Exclusion (FEIE) – Form 2555
- Foreign Tax Credit (FTC) – Form 1116
You cannot use both benefits on the same dollar of income. Below is an explanation of how each option works and when you can use both strategically — but not on the same income.
How Each One Works
The Foreign Earned Income Exclusion lets you exclude a set amount of foreign‑earned wages or self‑employment income from U.S. tax each year. See our article, What is the Foreign Earned Income Exclusion (Form 2555)?, for this year's exclusion limit — it's adjusted annually, so we keep the current figure there rather than repeating it in multiple places.
The Foreign Tax Credit provides a dollar‑for‑dollar reduction of U.S. tax for qualifying foreign income taxes paid.
A Common Mistake to Avoid
The most common error here isn't choosing the wrong tool — it's applying both tools to the same income.
Example: Say you're a U.S. citizen working abroad. You earn $90,000 in foreign wages, all of which qualifies for and is excluded under the FEIE. Your employer also withheld $12,000 in foreign income tax on those same wages.
Because that $12,000 in foreign tax was paid on income you excluded from your U.S. return, you cannot also claim it as a Foreign Tax Credit. Entering that $12,000 on Form 1116 in addition to excluding the wages on Form 2555 would be claiming the same tax benefit twice on the same income — this is the "double‑dip" the IRS rules are designed to prevent.
Now say you also earned $3,000 in foreign bank interest that wasn't excluded (interest doesn't qualify for the FEIE — only earned income does), and you paid $400 in foreign tax on that interest. That $400 can be claimed as a Foreign Tax Credit on Form 1116, because it relates to income that wasn't excluded.
If Only Part of Your Income Is Excluded
If your foreign wages are only partly excluded — for example, because they exceed the annual FEIE limit — the foreign tax on the excluded portion still can't be credited, but the tax on the non‑excluded portion may be. You can't simply treat "whatever's left after FEIE" as one lump amount, either: it still needs to be sorted into the correct income category (Passive, General, etc.) on Form 1116, the same as any other foreign income. This apportionment can get involved — the program will help guide you through it, but if your situation involves a partial exclusion, it may be worth double‑checking the result or speaking with a tax professional.