What’s the difference between FTC and FEIE?
There are usually two deductions from which a United States (US) citizen living outside the country can benefit. These are the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credits (FTC). The FEIE inflates every tax year. Hence, it may differ each time you file.
What is the Foreign-Earned Income Exclusion (FEIE)?
The Foreign-Earned Income Exclusion (FEIE) is a US tax provision that allows American expatriates to exclude a certain amount of their foreign-earned income from US taxable income.
2023 Exclusion Limit: For the tax year 2023, the FEIE allows US expats to exclude up to $120,000 of their foreign-earned income.
Qualification Criteria: To qualify, you must:
- Live outside the US for at least 330 days in a 12-month period.
- Establish resid ency in a foreign country.
- Earn foreign income.
In addition to the FEIE, you can also deduct certain housing expenses, like rent and utilities. The amount you can deduct varies depending on your location in the UAE, with different thresholds for cities like Dubai, Abu Dhabi, and Al Ain.
What is the Foreign Tax Credit (FTC)?
The Foreign Tax Credit (FTC) is another critical tool for US expatriates to mitigate the potential double taxation on income earned abroad. This credit allows US taxpayers to offset their US tax liability with most of the income taxes paid to a foreign government.
Until the UAE charges income tax on earned income, the FTC is of no use to US citizens and Green Card holders working and earning in the United Arab Emirates.
- Example Scenario: If you’re a US citizen living in Germany, where you’re taxed on your worldwide income, the taxes you pay in Germany can be credited against your US tax liability.
One advantage of the FTC is the ability to carry forward unused credits for up to 10 years, providing a potential tax benefit in future years.
How do I choose between FEIE and FTC?
It all depends on your situation. The choice between using the FEIE or the FTC depends on various factors, including your country of residence and its tax system.
However, for those in the UAE, where there’s no income tax, the FEIE is often the only way to go. On the other hand, in countries with income tax, like Germany, the FTC might be more advantageous, especially with the carry forward option.
What are the key points to remember for FEIE and FTC?
- Understand Your Options: Familiarize yourself with both the FEIE and FTC to determine which is more suitable for your situation.
- Location-Specific Rules: Be aware that certain benefits, like housing deductions under the FEIE, vary based on your location.
- Professional Advice: Given the complexities, consulting with a tax professional can provide clarity and ensure you’re maximizing your tax benefits.
For US citizens living abroad, effectively managing tax obligations involves a thorough understanding of both the foreign-earned income exclusion and the foreign tax credit. By receiving support from a tax professional to carefully assess your circumstances and the tax laws of your country of residence, you can make informed decisions to optimize your tax position and avoid double taxation.
Why partner with a specialist Expat accountant?
Living outside of the US can make your tax filing requirements complicated. To ensure you pay the minimum amount of taxes, it’s critical to work with an accountant who understands every aspect and avenue for reducing your tax liability. We have a dedicated team of tax accountants who work exclusively with US expats earning and investing in the UAE. Partnering with a specialist expat accountant can help you navigate complex tax regulations and optimize your tax situation.
