If you’re an American living abroad and you’ve done even a little Googling about taxes, you’ve probably run into the Foreign Earned Income Exclusion pretty quickly. It sounds almost too neat. You live overseas. You earn money overseas. You exclude that income from US tax. Done.
And to be fair, sometimes it really is that simple.
But not always. And that’s where people get tripped up.
Why FEIE feels like the obvious answer
There’s a reason FEIE has such a strong hold on expat thinking. The headline is clean: exclude your foreign earned income from US taxation, up to a yearly limit. For the 2025 tax year, that limit is $130,000 per qualifying person.
Tax software nudges you toward it. Blog posts mention it first. Friends recommend it over coffee with a kind of certainty that feels reassuring. Compared to tax credits, limitations, and carryforwards, FEIE feels like a clean exit door from the US system.
Emotionally, it’s satisfying. You’re abroad. You’ve already paid tax somewhere else. Excluding the income feels like drawing a line and moving on.
That instinct isn’t wrong. It’s just incomplete.
What FEIE actually does—and what it gives up
At its core, FEIE removes qualifying foreign earned income from US taxation. The IRS simply doesn’t tax that slice at all. Wages. Salary. Self-employment income, if you qualify under the physical presence or bona fide residence tests.
However, once income is excluded, something else quietly disappears with it. You can’t use foreign taxes paid on that excluded income to claim the Foreign Tax Credit. The IRS doesn’t allow both.
This trade-off doesn’t usually hurt in year one. Your tax bill looks fine. Maybe even zero. The problem is that the cost of FEIE often shows up later, when income rises, circumstances change, or credits would have mattered more than exclusions.
FEIE solves today’s problem very efficiently. It doesn’t always age well.
When FEIE works well
There are plenty of situations where FEIE does exactly what it’s supposed to do.
Someone working in a lower-tax country, for example, might not have enough foreign tax paid to offset US tax anyway. In that case, excluding income can reduce or eliminate US tax cleanly.
Early-stage freelancers and contractors often benefit too. Income may be uneven, deductions are still settling, and simplicity has real value. FEIE can buy breathing room.
Short-term assignments also fit nicely. If you’re abroad for a defined period and expect to return to the US system later, FEIE can be a practical, temporary solution.
In these cases, FEIE isn’t a shortcut. It’s a reasonable choice.
When FEIE can quietly work against you
Problems tend to appear in higher-tax countries. Think places where income tax rates regularly exceed US rates. In those situations, foreign tax credits often wipe out US tax entirely, sometimes with credits left over.
FEIE blocks that. Excluded income can’t generate credits. Those unused foreign taxes don’t carry forward. They’re just gone.
Over time, this can matter. Especially for long-term expats whose income grows, who invest, or who later move to a different country. Switching from FEIE to credits isn’t always seamless, and some choices lock in consequences for years.
There’s also the issue of US credits and deductions. FEIE can reduce or eliminate eligibility for certain benefits because the excluded income isn’t counted the same way. That’s rarely obvious when you’re just trying to get a return filed on time.
None of this means FEIE is a mistake. It just means it isn’t neutral.
Why this choice is strategic, not just technical
The real issue isn’t FEIE versus the Foreign Tax Credit. It’s default versus intention.
Income changes. Countries change. Family situations change. A filing approach that made perfect sense five years ago may quietly stop making sense now.
Tax software can’t see that arc. It can only optimize the current year.
That’s why this decision works better when it’s treated as strategy rather than setup. Something revisited occasionally. Questioned, even.
Choosing clarity over defaults
FEIE isn’t bad. It’s just specific. And specificity matters when you’re dealing with two tax systems that don’t talk to each other.
Expat Tax Online helps Americans abroad step back and look at how today’s choices affect tomorrow’s filings. Sometimes FEIE is the right move. Sometimes it isn’t. The value comes from knowing the difference, before the default decides for you.
If FEIE feels automatic, that’s usually the moment it’s worth slowing down and checking whether it actually fits your bigger picture.
