What are the Tax Credits for Americans Living and Working Abroad?

Americans living and working abroad can take advantage of several tax credits to reduce their U.S. tax liability. Here are the key ones:

1. Foreign Tax Credit (FTC) – Most Important

  • What it does: Offsets U.S. taxes dollar-for-dollar for taxes paid to a foreign country.
  • Who qualifies: Anyone who pays income taxes to a foreign government (e.g., via payroll, capital gains, dividends).
  • How to claim: Form 1116 (or Form 1118 for corporations).
  • Key rules:
    • Must be an income tax (not VAT, property tax, etc.).
    • Can carry unused credits back 1 year and forward 10 years.
    • Can choose between FTC and Foreign Earned Income Exclusion (FEIE)—whichever saves more.

2. Foreign Earned Income Exclusion (FEIE) – Not a Credit, but Helps

  • What it does: Excludes up to ~$120,000 (2025 est.) of foreign-earned income from U.S. taxes.
  • Who qualifies: Must pass either the Bona Fide Residence Test or Physical Presence Test.
  • How to claim: Form 2555.
  • Note: If you exclude income with FEIE, you cannot claim FTC on the same income.

3. Foreign Housing Exclusion (FHE) / Deduction

  • What it does: Excludes/deducts certain housing costs (rent, utilities) above a base amount.
  • Who qualifies: Same as FEIE.
  • How to claim: Form 2555.

4. Child Tax Credit (CTC) & Additional Child Tax Credit (ACTC)

  • What it does: Up to $2,000 per child (2025 est.), partially refundable.
  • Who qualifies: U.S. citizens/residents with dependent children under 17.
  • Key rule: Must have at least $2,500 in earned income (foreign income counts).

5. Education Credits (American Opportunity Tax Credit & Lifetime Learning Credit)

  • What they do: Reduce taxes for higher education expenses (tuition, books).
  • Who qualifies: U.S. taxpayers (or dependents) paying for college.
  • Key rule: Must file a U.S. return and meet income limits.

6. Retirement Savings Contributions Credit (Saver’s Credit)

  • What it does: Credit for contributions to an IRA or 401(k)-equivalent abroad.
  • Who qualifies: Low-to-moderate-income taxpayers.

7. Exclusion for Foreign Employer Contributions to Retirement Plans

  • Some foreign pension plans (e.g., UK’s QROPS, Canadian RRSP) may qualify for tax deferral under U.S. tax treaties.

Which Should You Use?

  • If foreign taxes > U.S. taxes → FTC is better (you get a refund or carryforward).
  • If foreign taxes < U.S. taxes → FEIE may be better (exclude income entirely).

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