Form 1116 Foreign Tax Credit vs. Form 2555 Foreign Earned Income Exclusion which one is better?

Jun 10, 2020 | Tax, US Tax | 0 comments

If you have recently moved out of America and this is your first year filing 1040 tax return with additional reporting of foreign income (i.e income earned outside of the USA or Non W2 income). It’s very common to get confused to take your call on to use Foreign Earned Income Exclusion (FEIE) or Foreign Tax Credit (FTC) during your 1040 tax return preparation.

Well, both Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC) have an advantage to reducing the tax to zero but often depends on various factors like the countries you are currently residing as a US citizen or Greed card holder, The tax treaty between country of residence and USA, the tax rates in foreign countries, etc. 

Mr Michael, US Citizen if lands up taking a dream job in Saudia Arabia or United Arab Emirates (U.A.E ) he would better of using the FEIE Form 2555. 

On the other hand, if Mrs. Trump is a US citizen working in the United Kingdom or Europe, she would be better off taking the FTC Form 1116 filing to keep her US tax reduced to low or zero.

This process can be stress free, If you are using your expatriate tax consultants dealing with expatriate US citizens living abroad that team will take a best call on the reporting with an scenario based analysis and tax planning.

US Expat Abroad Advantages of claiming Foreign Tax Credit (FTC)?

  • FTC computation reduces taxes dollar by dollar of the US tax liability and any unused foreign taxes can be carried forward up to 10 tax years and carry back up to one year to amend any 1040 tax return to offset taxes against foreign earned income. Even if you are moving to a low tax country like Singapore or Hong Kong, you can use such carryovers and take advantage of unused foreign taxes paid, Whereas with FEIE this option only allows the foreign tax liability to zero.
  • The Additional child tax credit is a refundable tax credit allowing one to receive up to $2,000 per child per year (2019 – could be restricted to $1400). With the FEIE you cannot claim this credit when the FEIE is used. 
  • Foreign Tax Credit allows to revert or switch to Foreign Earned Income Exclusion route but not vice versa, revoking restriction applies to the Foreign Earned Income Exclusion once revoked FEIE you cannot use it again for another 5 years. 

Our team specialise with international expatriate U.S. personal tax return service. If you need assistance with US 1040 filing for refund claim/FATCA Compliance work/FBAR FINCEN114 Filing, ITIN/ Form W7 Application/EIN/Form W8BENE or CAA services/1040NR U.S. tax filing for refund claim of excess 1042S / 8288A/ 8805/ W2/ 1099. We are happy to assist our clients in a timely, efficient and cost-effective way

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