Foreign Tax Credit vs Foreign Earned Income Exclusion
As a US expat in Australia, you have two main tools to avoid double taxation: the Foreign Tax Credit (FTC) and the Foreign Earned Income Exclusion (FEIE).
Foreign Tax Credit (Form 1116)
Gives you a dollar-for-dollar credit against US tax for taxes paid to Australia. Works for all income types, excess credits carry forward 10 years, and there's no income limit.
Foreign Earned Income Exclusion (Form 2555)
Excludes up to $130,000 of foreign earned income from US taxation. Simple concept, but only applies to earned income and has qualification tests.
Which is better for Australia?
For most US expats in Australia, the Foreign Tax Credit is usually better. Australia has higher tax rates than the US for most income levels. With FTC, you can use excess Australian tax as credits for future years.
When FEIE might make sense
If you're in a low Australian tax bracket, have minimal investment income, or want simplicity over optimization.
Can you use both?
Yes, but not on the same income. You could use FEIE for salary and FTC for investments, but this adds complexity.
Not sure which to choose?
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