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 taxed on their worldwide income, regardless of where they live or where they earn the money. If you are working abroad for a U.S. company in 2025, you have two primary mechanisms to avoid being taxed twice on the same income by the U.S. and the foreign country: the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC).

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

The FEIE allows qualifying individuals to exclude a significant portion of their foreign earned income from U.S. taxation. For the 2025 tax year, the maximum exclusion amount is indexed for inflation, but is generally around USD 126,500 (based on the 2024 figure, subject to typical adjustment). To qualify for the FEIE, you must meet either the Physical Presence Test or the Bona Fide Residence Test.

• Reporting: You claim the FEIE by filing Form 2555, Foreign Earned Income Exclusion.
• Limitation: The exclusion only applies to earned income (wages, salaries, self-employment income). It does not apply to passive income (interest, dividends, capital gains).

### 2. Foreign Tax Credit (FTC)

The FTC allows you to claim a dollar-for-dollar credit against your U.S. tax liability for income taxes paid to a foreign country.

• Reporting: You claim the FTC by filing Form 1116, Foreign Tax Credit (Individual, Estate, or Trust).
• Benefit: The FTC is generally more beneficial if your foreign tax rate is higher than the U.S. tax rate on that income, as it can reduce your U.S. tax liability to zero on that income.

### Choosing Between FEIE and FTC

You generally cannot use both methods on the same income. Taxpayers must choose the method that results in the lowest U.S. tax liability.

Strategy Note: If you exclude income using the FEIE, you cannot also claim a credit for foreign taxes paid on that same excluded income. Conversely, if you claim the FTC, you must include all foreign income in your gross income.

### Reporting Worldwide Income

Regardless of whether you claim the FEIE or the FTC, you must still report all your income (foreign and domestic) on your standard Form 1040. If you exclude income via Form 2555, the excluded amount reduces your total income, thereby reducing your overall U.S. tax burden. If you use Form 1116, the credit directly reduces the tax due on the total income.

IRS Reference: Publication 54 provides comprehensive guidance on meeting the tests for both the FEIE and the FTC.