How To Avoid Double Taxation on Foreign Income as a US Expat?

If you also pay income tax in your country of residence, you may face the risk of double taxation – being taxed twice on the same earnings. Fortunately, there are several strategies available for reducing or eliminating this exposure.

In this guide, we explain how to avoid double taxation on foreign income using tools such as tax treaties, the Foreign Earned Income Exclusion (FEIE), and the Foreign Tax Credit (FTC).

You will learn who qualifies, how each mechanism works, and how to apply them correctly to reduce your overall tax burden while remaining fully compliant.

What Foreign Income Is Taxable in the US?

Foreign income is defined as any income earned from sources outside the US. It is divided into three categories—earned, unearned, and variable—all of which are taxable in the US.

It’s important to distinguish between earned and unearned income because the foreign earned income exclusion regulation applies to earned income only.

What Is Double Taxation and Who Is Subject to It?

Double taxation is defined as paying taxes twice on the same income or assets. If you’re an American citizen, this can happen because the US is one of the rare countries with citizenship-based rather than residency-based taxation. This means that all your worldwide income is taxable in the US, regardless of your residency status.

Your country of residence will likely also impose income taxes, which can lead to double taxation—unless you leverage one of the strategies below.

Still, tax systems can be complex and confusing, especially when you need to consider two different countries. Professional tax planning advisers at Titan Wealth International can help you streamline your tax obligations and avoid paying taxes twice.

Key Strategies To Avoid Double Taxation for US Citizens

Double taxation can put a strain on your budget, but there are three key strategies you can use to avoid this:

1. US tax treaties
2. Foreign Earned Income Exclusion
3. Foreign Tax Credit

US Tax Treaties

A US tax treaty is a bilateral agreement between the United States and another country that regulates which country has the right to tax a specific source of income. Currently, the US has income tax treaties with almost 70 countries worldwide.

These treaties have several benefits for US residents and citizens, such as:

• Avoiding double taxation when living abroad: Tax treaties prevent individuals from paying taxes on the same type of income in the US and the foreign country.
• Reduced tax rates: Under US tax treaties, specific types of income come with lower tax rates, such as dividends, interest, or royalties.
• Exemptions for certain income sources: Under these treaties, some income sources (pensions, social security, and government employment) are exempt from taxation.
• Simplified tax compliance: Tax treaties help define reporting requirements, making it easier for individuals to file taxes in multiple counties.

While tax treaties offer numerous advantages for US residents, their benefits for US citizens are not as straightforward because of saving clauses.

A saving clause preserves the right of each country to tax its own citizens or residents as if the treaty didn’t exist. For US expats, this means that most benefits offered by tax treaties cannot be used to reduce US tax obligations.

However, there are two other tools that you can use as a US expat to avoid double taxation on foreign income and reduce your tax burden—the Foreign Earned Income Exclusion and the Foreign Tax Credit.

Tax treaties often include Mutual Agreement Procedures (MAP), which allow taxpayers to raise disputes if they believe either country has imposed taxation that violates the treaty. The goal of the MAP is to eliminate double taxation and ensure the correct application of taxing rights.

Foreign Earned Income Exclusion

Foreign Earned Income Exclusion (FEIE) is a tool that allows US expats to subtract their foreign earnings from US taxable income. If you live and work abroad, use the Internal Revenue Service’s (IRS) Form 2555 to report your foreign earned income.

Examples of earned income that FEIE is applicable to include:

• Wages and salaries
• Professional fees
• Commissions
• Bonuses and tips

The maximum exclusion amount changes every year as it’s adjusted for inflation. For the 2024 tax year (returns filed in April 2025), the FEIE – claimed via IRS Form 2555 – allows exclusion of up to $120,000 of foreign-earned income.

For the 2025 tax year (returns filed in April 2026), this amount increases to $130,000, reflecting annual inflation adjustments according to IRS Revenue Procedure 2024-40.

Who Can Claim the Foreign Earned Income Exclusion?

To qualify for the Foreign Earned Income Exclusion (FEIE), you must:

1. Have foreign earned income,
2. Have your tax home in a foreign country, and
3. Meet one of two eligibility tests outlined by the IRS.

You are eligible if you are a:

• US citizen or resident alien whose tax home (your regular or principal place of business or employment) is in a foreign country and who meets either:
  • The Bona Fide Residence Test: You were an uninterrupted resident of a foreign country for a full tax year, typically implying intent to stay long term; or
  • The Physical Presence Test: You were physically present in one or more foreign countries for at least 330 full days in any 12-month period.

You may also qualify if you are a:

• US resident alien who is a citizen of a country with a US tax treaty and who meets the Bona Fide Residence Test.

In addition to the FEIE, certain employees may also qualify for the foreign housing exclusion or deduction, which allows for the exclusion of employer-paid housing expenses in a foreign country.

To ensure you meet the qualification tests and file correctly, we recommend speaking with a cross-border tax specialist. Titan Wealth International’s expat tax consultants can assist with FEIE eligibility, calculations, and filing compliance.

Foreign Tax Credit

The Foreign Tax Credit allows US citizens to reduce their US tax liability on a dollar-for-dollar basis based on the taxes they have paid or accrued to a foreign country. For example, if you paid $2,000 in tax in a foreign country and owe $5,000 in the US, you could claim a $2,000 tax credit and pay only $3,000 in the US.

Unlike FEIE, you can claim foreign tax credit on both earned and unearned income, but only income, war profits, and excess profits taxes qualify for the credit. You can also claim both the FTC and the FEIE in the same year but not on the same income.

If you live in a country with a higher income tax rate than the US, you can use this credit to erase your US tax. Additionally, if the amount you paid exceeds your FTC limit for the year, you can carry over the excess to reduce your tax next year.

Who Can Claim the Foreign Tax Credit?

To claim the foreign tax credit, you must meet the following three criteria:

1. You are a US citizen
2. You earn foreign income
3. You owe or pay income taxes to a foreign government

If you meet these requirements, you can file Form 1116 to claim the foreign tax credit.

Common Challenges You May Encounter

Filling taxes in multiple countries and avoiding double taxation when living abroad is a complicated process with multiple potential hurdles. The most common taxation challenges US expats face include:

• Complex filing requirements: Countries typically require different documentation when filing taxes, which can quickly become overwhelming, increasing the risk of making a mistake.
• Differing tax years: The US and your country of residence may have differing tax years and filing deadlines, making it challenging to keep track of all the timelines.
• Currency exchange complications: When filing US taxes, you need to convert your foreign income into US dollars, which can be complicated due to fluctuating exchange rates.

To streamline the expat tax planning process, avoid mistakes, and minimize your tax liabilities, it’s highly recommended to seek professional assistance.