What is the Foreign Tax Credit, and should I use it instead of the FEIE?

The Foreign Tax Credit (FTC) is a dollar-for-dollar reduction of your U.S. tax bill based on the taxes you have already paid to a foreign country. It is designed to ensure you aren't taxed twice on the same income.

When to use the FTC: The FTC is generally the best choice if you live in a high-tax country (like the Netherlands, Germany, or the UK) where your local tax rate is higher than the U.S. rate. Because it provides a direct credit against your U.S. tax liability, it can often bring your U.S. bill to $0. Unlike the FEIE, the FTC can also be applied to "passive" income like dividends, interest, or rental profits. Additionally, if you pay more in local taxes than you would owe in the U.S., you can "carry over" those extra credits to use in future tax years.

The Bottom Line: While the FEIE hides your income, the FTC uses your local taxes to cancel out your U.S. debt. Choosing between them depends on your local tax rate and whether you want to claim family-related tax refunds.

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