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Determine the exclusion-versus-credit choice and reporting for foreign income
A U.S. citizen or resident working abroad faces one income with two possible reliefs: exclude the earnings under section 911 or leave them in and credit the foreign tax against the U.S. tax. Treaties and information returns add further reporting. This lesson sets the exclusion tests, the credit rules, and the choice between them.
The foreign earned income exclusion removes qualifying earnings from U.S. income rather than crediting tax against them. The exclusion requires three conditions: a tax home in a foreign country, income from personal services performed there, and one of two time tests. The tax-home condition fails where the worker's base stays in the United States: the rule requires a tax home in a foreign country, so a year abroad with a U.S.-centered home, family ties, and daily life does not qualify for the exclusion. The physical-presence test counts 330 full days in a foreign country or countries during 12 consecutive months, with no consecutiveness required. The bona-fide-residence test looks at settled residence, and a year of living abroad does not by itself confer it; that test further requires a residence period that includes one full tax year, and a resident alien may use it only as a citizen or national of a country with which the United States has an income tax treaty in effect.
The exclusion also has a ceiling: no more than the smaller of the year’s maximum amount and the taxpayer’s foreign earned income minus the housing exclusion. For 2025 the maximum amount is $130,000. Where the tests are met for only part of the tax year, the maximum is prorated to the qualifying days. Earnings above the ceiling stay in income. Wages that are completely excluded carry no credit or deduction for the foreign taxes paid on them; where only part of the wages is excluded, the foreign income tax allocable to the excluded part — found by applying the excluded-portion fraction to the foreign tax on the year’s foreign earned income — likewise gets no credit or deduction. Not all pay earned abroad can enter the exclusion: amounts the United States or its agencies pay their employees are not foreign earned income. And claiming the exclusion has a cost elsewhere on the return: a taxpayer who claims the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction cannot claim the earned income credit or the additional child tax credit for that year.
Alongside the earnings exclusion, a qualifying worker may also exclude or deduct certain foreign housing amounts. The housing amount is total housing expenses for the year minus the base housing amount; the housing exclusion is the lesser of the part of that amount paid for with employer-provided amounts and the worker’s foreign earned income, and it is figured before the earned income exclusion, while the housing deduction is only for amounts paid for with self-employment earnings.
Maya, a U.S. citizen, keeps her tax home in Berlin, performs consulting services there all year, and spends 340 full days outside the United States within a 12-month span. She meets the physical-presence test and may exclude up to the ceiling. Had she spent only 300 days abroad with no settled foreign residence, neither test would be met and no exclusion would be allowed.
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To qualify, you must have a tax home in a foreign country, earn income from personal services performed in a foreign country, and meet either the physical presence or bona fide residence test.View on the source
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must be physically present in a foreign country (or countries) for 330 full days during a period of 12 consecutive months. The 330 days don’t have to be consecutive.View on the source
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You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year.View on the source
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You cannot exclude more than the smaller of: • The maximum annual exclusion amount allowed for the specific tax year, or • Your foreign earned income for the tax year minus your foreign housing exclusion (discussed later).View on the source
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You must have a tax home in a foreign country (or countries).View on the source
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the period of foreign residence must include 1 full tax year (usually January 1–December 31)View on the source
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The physical presence test applies to all resident aliens, while the bona fide residence test applies to resident aliens who are citizens or nationals of a country with which the United States has an income tax treaty in effect.View on the source
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If you didn’t meet either of these tests for your entire tax year, you must prorate the maximum exclusion based on the number of days that you did meet either test during the year.View on the source
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If your wages are completely excluded, you can’t deduct or take a credit for any of the foreign taxes paid on your wages.View on the source
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If only part of your wages is excluded, you can’t deduct or take a credit for the foreign income taxes allocable to the excluded part.View on the source
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In addition, you may qualify to exclude or deduct certain foreign housing amounts.View on the source
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For taxable years beginning in 2025, the foreign earned income exclusion amount under § 911(b)(2)(D)(i) is $130,000.View on the source
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Amounts paid by the United States or its agencies to their employees aren’t treated for this purpose as foreign earned income.View on the source
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If you claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you can’t claim the earned income credit.View on the source
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If you claim the foreign earned income exclusion, the foreign housing exclusion, and/or the foreign housing deduction, you can't claim the additional child tax credit.View on the source
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Your housing amount is the total of your housing expenses for the year minus the base housing amount.View on the source
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Your foreign housing exclusion is the lesser of: • That part of your housing amount paid for with employer-provided amounts, or • Your foreign earned income.View on the source
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The housing deduction applies only to amounts paid for with self-employment earnings.View on the source
A U.S. citizen keeps a tax home in a foreign country and meets the physical presence test. Which amount can qualify for the foreign earned income exclusion?
Where the exclusion removes income, the foreign tax credit offsets U.S. tax with income taxes imposed by a foreign country. Customs duties are neither creditable nor deductible: like federal excise taxes, they aren’t deductible. Other non-income levies are deductible only in narrow cases — other foreign taxes, such as real property or personal property taxes, only where the expenses were incurred in a trade or business or in the production of income — and that deduction sits apart from the credit, so miscellaneous foreign taxes can be deducted while the credit is claimed for income taxes. The income taxes themselves face one yearly choice: in a given year, either claim a credit for all foreign taxes that qualify for the credit or deduct all of them. The credit is claimed on Form 1116 unless an exception excuses the form, and it is capped: the credit is the foreign tax paid or accrued or, if smaller, the limit figured on Form 1116. Only tax on income still subject to U.S. tax enters the comparison — tax allocable to excluded earnings gets no credit or deduction — so the comparison has to run both ways on the allowable portion: figure the tax claiming the credit and claiming the deduction, then take the better answer.
Treaties add a disclosure step. A treaty-based position that overrules or reduces U.S. tax is generally disclosed on Form 8833 attached to the return, and a taxpayer whose treaty position eliminates the filing requirement files anyway to report the position. Disclosure is not required for every treaty benefit: no Form 8833 is needed for a reduced rate of withholding on noneffectively connected income such as dividends, interest, rents, or royalties, or for a reduced rate of tax on employee-services pay including pensions, annuities, and social security. Foreign-asset reports flagged at intake are filed separately, each on its own form and deadline.
Jon earns $60,000 working in a treaty country, pays $9,000 of that country’s income tax and $400 of its real property tax on his overseas rental, and claims a treaty provision that reduces the U.S. tax on part of his independent-service income (not a reduced withholding or employee-pay rate). He runs the credit-versus-deduction comparison on the $9,000 income tax — the credit only up to its limit — deducts the $400 real property tax, and discloses the treaty position on Form 8833. Had the $400 been a customs duty on shipped goods instead, it would be neither creditable nor deductible.
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You can take deductions for these miscellaneous foreign taxes and also claim the foreign tax credit for income taxes imposed by a foreign country.View on the source
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You must file Form 1116 to claim the foreign tax credit unless you meet one of the following exceptions.View on the source
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Figure your tax both ways—claiming the credit and claiming the deduction.View on the source
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you must generally disclose that position on Form 8833 and attach it to your return.View on the source
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You must file your Form 1040 or 1040-SR with Form 2555.View on the source
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In addition, there is a limit on the amount of the credit that you can claim. You figure this limit and your credit on Form 1116.View on the source
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If only part of your wages is excluded, you can’t deduct or take a credit for the foreign income taxes allocable to the excluded part.View on the source
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The filing of Form 8833 does not apply to a reduced rate of withholding tax on noneffectively connected income, such as dividends, interest, rents, or royalties, or to a reduced rate of tax on pay received for services performed as an employee, including pensions, annuities, and social security.View on the source
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If you are not required to file a return because of your treaty-based position, you must file a return anyway to report your position.View on the source
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You cannot deduct other foreign taxes, such as real property or personal property taxes, unless you incurred the expenses in a trade or business or in the production of income.View on the source
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No. Customs duties, like federal excise taxes, aren’t deductible.View on the source
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In a given year, you must either claim a credit for all foreign taxes that qualify for the credit or claim a deduction for all of them.View on the source
A taxpayer paid qualified foreign income tax and foreign real property tax on an overseas rental. How should the amounts be routed for the year?
Work through the three reliefs in order. First ask whether the exclusion tests are met and the income is earned income from foreign services — only that income can be excluded, and only within the ceiling. Then, for whatever foreign tax remains relevant, compare credit against deduction rather than assuming the credit wins: only tax on income still subject to U.S. tax enters the comparison, and the credit itself is capped at its Form 1116 limit, so low foreign rates and excluded income both change the answer. Finally, attach every choice to its form: the exclusion is elected by filing Form 1040 or 1040-SR with Form 2555, the credit goes on Form 1116 unless an exception excuses the form, and treaty positions reducing U.S. tax are disclosed on Form 8833.
An exclusion election persists, and revoking it has consequences. The choice stays in effect for that year and all later years unless revoked, and the taxpayer revokes by choosing differently: taking the foreign tax credit, the additional child tax credit, or the earned income credit in a later year counts as revoking the prior choice. A revoked choice cannot be taken up again within five years without IRS approval — re-electing the same exclusion inside that window requires requesting a ruling from the IRS.
Alba earns $160,000 abroad, meets the physical-presence test, and pays $30,000 in foreign income tax. She excludes $130,000 under the 2025 ceiling, then compares crediting the tax attributable to the remaining $30,000 of income against deducting it. Had a treaty provision reduced the U.S. tax on a portion of her independent-service income (not merely withholding or employee pay), she would disclose that portion on Form 8833 whatever else she chose.
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You must file your Form 1040 or 1040-SR with Form 2555.View on the source
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You must file Form 1116 to claim the foreign tax credit unless you meet one of the following exceptions.View on the source
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you must generally disclose that position on Form 8833 and attach it to your return.View on the source
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In addition, there is a limit on the amount of the credit that you can claim. You figure this limit and your credit on Form 1116.View on the source
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If only part of your wages is excluded, you can’t deduct or take a credit for the foreign income taxes allocable to the excluded part.View on the source
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You can revoke your choice for any year.View on the source
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if you decide to take the foreign tax credit, additional child tax credit, or earned income credit in a subsequent year, you will be considered to have revoked your prior choice.View on the source
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If you revoked a choice and within 5 years again wish to choose the same exclusion, you must apply for IRS approval.View on the source
A qualifying taxpayer earned only foreign wages, excluded part of them, and paid foreign income tax on the wages. What sequence fits?
The course asks you questions like these as you learn, brings back the ones you miss, and ends with full-length practice exams.
See the course Or take the free 12-question checkGroundSkill is independently produced and is not affiliated with or endorsed by the IRS. Sources last checked 2026-09-14. Exam preparation, not tax advice.