Comparing the Foreign Earned Income Exclusion and the Foreign Tax Credit

Which Leads to Greater Savings?

John Owsley, PhD, and John McKinley, JD, CPA, CGMA

The United States taxes the worldwide income of U.S. citizens, resident aliens, and domestic corporations without regard to whether that income arose from a transaction or activity originating outside the country's borders. Consequently, when U.S. citizens, resident aliens, or domestic corporations file a U.S. income tax return (e.g., Form 1040, U.S. Individual Income Tax Return; Form 1120, U.S. Corporation Income Tax Return), they could be subject to double taxation if they have foreign income; however, the foreign earned income exclusion (FEIE) and the foreign tax credit (FTC) can help alleviate the potential effects of double taxation. The simulations in this article can help tax advisors determine which method might be right for a particular taxpayer.