What are the benefits of FTC and FEIE?
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Foreign Earned Income Exclusion (FEIE)
The FEIE allows US expats to exclude a significant portion of their foreign-earned income from US taxes. For the tax year 2024, this exclusion amount is set at approximately $126,500.
To qualify, an individual must meet specific criteria, including:
- Residency: Establishing residency in a foreign country.
- Physical Presence: Spending at least 330 full days outside of the US in a 12-month period.
- Income Source: Earning income from foreign sources.
In addition to the income exclusion, expats can also deduct certain housing expenses from their taxable income. These expenses include rent, utilities, and other costs associated with living abroad.
Foreign Tax Credit (FTC)
The FTC is designed to prevent double taxation for US citizens who pay income tax to a foreign government. This credit allows taxpayers to offset their US tax liability with taxes paid to another country.
For example, suppose you’re a US citizen living in Germany, where residents are taxed on their worldwide income. In that case, the taxes you pay in Germany can be credited against your US tax obligations.
One significant advantage of the FTC is the ability to carry forward unused credits for up to 10 years, which provides flexibility and potential tax savings in the future.
How do I choose between FEIE and FTC?
Deciding whether to utilize the FEIE or FTC depends on your specific circumstances, including your country of residence, income level, and tax obligations in your host country.
For those in countries like the UAE, where there is no income tax, the FEIE often offers greater benefits. However, in countries with higher tax rates than the US, the FTC might be more advantageous, especially with the option to carry forward unused credits.
I’m working in Dubai and earning more than US$120,000—can I exclude more income?
Possibly. If you’re renting an apartment and paying utility bills, you’re likely to be eligible for the Foreign Housing Exclusion.
Why partner with a specialist Expat accountant?
Living outside of the US can make your tax filing requirements complicated. To ensure you pay the minimum amount of taxes, it’s critical to work with an accountant who understands every aspect and avenue for reducing your tax liability. We have a dedicated team of tax accountants who work exclusively with US expats earning and investing in the UAE. Partnering with a specialist expat accountant can help you navigate complex tax regulations and optimize your tax situation.
