The Foreign Tax Credit (FTC) is an essential resource for U.S. expatriates, allowing them to reduce their U.S. tax liabilities by claiming foreign taxes paid. As we move into 2025, there are key updates and insights regarding the FTC that expats should be aware of.
The Foreign Earned Income Exclusion (FEIE) increases to $130,000 in 2025, up from $126,500.
This means expats can now exclude more of their earned income from U.S. taxation.
However, while the FEIE provides a significant tax break, it doesn’t cover all situations. The FTC is particularly useful for income that falls outside this exclusion.
Eligibility for the FTC requires that you are a U.S. citizen or resident, have foreign income, and pay foreign taxes.
It is important to note that the FTC applies only to income taxes, not to taxes like Social Security.
Calculating the FTC involves a straightforward formula. Divide your foreign income by your total income, then multiply that ratio by your U.S. tax liability.
In practice, this means your credit might be limited based on the amount of foreign income in relation to your total income.
Recent examples illustrate how this works, showing different scenarios for expatriates living in various countries.
Unused FTC credits can be carried back one year or carried forward for up to ten years, providing more flexibility in tax planning.
While both the FTC and FEIE serve vital functions in expatriate tax strategy, they must be utilized differently.
You can’t apply both to the same income, but when used strategically, they can complement one another based on your income levels and foreign tax obligations.
It’s crucial for expats, especially those in high-tax countries, to evaluate their options.
The FTC can be more advantageous than the FEIE in certain scenarios. Recent updates highlight the ongoing importance of the FTC in managing your tax burden effectively.
Overall, staying informed about these developments can help you maximize your tax benefits as a U.S. expatriate in 2025.