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 and resident aliens are subject to tax on their worldwide income, regardless of where they live or where the income is earned. However, the IRS offers mechanisms—the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC)—to prevent double taxation when you work abroad for a U.S. company in 2025.

### Determining Eligibility: Bona Fide Residence or Physical Presence

To qualify to exclude or credit foreign earnings, you must meet one of two tests:

• Bona Fide Residence Test: You must be a U.S. citizen or resident alien who is a bona fide resident of a foreign country for an entire tax year.
• Physical Presence Test: You must be present in a foreign country for at least 330 full days during any continuous 12-month period that includes the tax year in question.

### Option 1: Foreign Earned Income Exclusion (FEIE)

If you qualify, you can elect to exclude a portion of your foreign earned income from U.S. taxation. For the 2025 tax year, the maximum exclusion amount is indexed for inflation, estimated to be around USD 126,500 (based on 2024 figures adjusted for inflation).

• Reporting: You must file Form 2555, Foreign Earned Income Exclusion, to claim this benefit. Only earned income (wages, salaries, professional fees) qualifies; passive income (interest, dividends, capital gains) is never excludable.
• Benefit: This exclusion directly reduces your U.S. taxable income.

### Option 2: Foreign Tax Credit (FTC)

Alternatively, you can claim a credit for income taxes paid to the foreign country. The FTC is generally more beneficial if your foreign tax rate is higher than the corresponding U.S. tax rate, as it provides a dollar-for-dollar reduction of your U.S. tax liability.

• Reporting: You must file Form 1116, Foreign Tax Credit (Individual, Estate, or Trust).
• Limitation: The credit is limited to the amount of U.S. tax that would be due on that foreign income. If you pay more foreign tax than the U.S. tax rate, the excess can often be carried back one year or forward ten years.

### Choosing Between FEIE and FTC

You generally cannot use both methods on the same dollar of income. You must choose which mechanism provides the greater benefit. A common strategy is:

• Use the FEIE to exclude income up to the maximum limit (e.g., USD 126,500).
• Use the FTC on any foreign earned income exceeding the FEIE limit, or on foreign passive income that doesn't qualify for the exclusion.

Important Note for U.S. Company Employees: Even if you are paid by a U.S. company while working abroad, your wages are still considered foreign earned income for purposes of these tests, provided you meet the physical presence or bona fide residence requirements. You must still report all income on Form 1040, even if the total taxable income after exclusions/credits nets to zero.

For definitive guidance, taxpayers should consult IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.