I am a US citizen working abroad for a US company. How do I report my foreign earned income and claim the Foreign Tax Credit or Exclusion for 2025?

U.S. citizens are subject to tax on their worldwide income, regardless of where they live or where the income is earned. However, the U.S. tax code provides mechanisms to prevent double taxation when income is earned in a foreign country where income taxes are also paid: the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC).

### Reporting Worldwide Income

All income must first be reported on Form 1040. You will use either Form 2555 (Foreign Earned Income Exclusion) or Form 1116 (Foreign Tax Credit) to claim relief from double taxation.

### 1. Foreign Earned Income Exclusion (FEIE)

FEIE allows qualifying individuals to exclude a significant portion of their foreign earned income from U.S. taxation for 2025. For 2025, the maximum exclusion amount is projected to be approximately USD 126,500 (indexed for inflation).

To qualify for the FEIE, you must meet either the Physical Presence Test or the Bona Fide Residence Test:

• Physical Presence Test: You must be present in a foreign country for at least 330 full days during any period of 12 consecutive months.
• Bona Fide Residence Test: You must be a bona fide resident of a foreign country for an entire tax year.

Key Limitation: You cannot claim both the FEIE and the Foreign Tax Credit on the same income. If you exclude income using FEIE, you cannot claim a credit for foreign taxes paid on that excluded income.

### 2. Foreign Tax Credit (FTC)

If your foreign income exceeds the FEIE limit, or if you do not qualify for the FEIE, you can claim the Foreign Tax Credit (FTC) using Form 1116. The FTC provides a dollar-for-dollar credit against your U.S. tax liability for income taxes you have already paid to a foreign government.

Key Advantage: The FTC is generally more beneficial if you live in a high-tax country, as it allows you to offset your U.S. tax liability on all your income (both foreign and U.S. sourced) up to the U.S. tax rate for that foreign income. Unused FTCs can often be carried back one year or carried forward ten years.

### Working for a U.S. Employer While Abroad

If you are working for a U.S. employer while physically abroad, the situation can be complex:

• If you meet the FEIE tests: Your wages are foreign earned income and can be excluded (up to the limit).
• Withholding Issues: Your U.S. employer may still withhold U.S. taxes if they do not have foreign payroll mechanisms. If U.S. taxes were withheld, you generally claim those withholdings as a credit on Form 1040, and then use Form 2555 or 1116 to handle the foreign income aspect.

Note on Social Security/Medicare: U.S. Social Security and Medicare taxes are generally still required if you are working for a U.S. employer, even if you are abroad, unless a specific Totalization Agreement exists between the U.S. and that country.

IRS Reference: Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, provides the definitive guidance on meeting the tests and completing Forms 2555 and 1116.