Foreign Tax Credit vs Foreign Earned Income Exclusion
General interaction, earned vs passive income, Japanese tax credits, and carryovers.
On your US return, the Foreign Tax Credit offsets US tax with foreign income tax paid, while the Foreign Earned Income Exclusion excludes a capped amount of earned income; which is better — or how to combine them — depends on your income mix and Japanese tax, and should be modeled professionally.
Effective: 2026-01-01 to 2026-12-31
Professional review pending — treat as draft and confirm with the authorities.
Key points
- FTC: credits foreign income tax against US tax (good when foreign tax is high).
- FEIE: excludes a capped amount of earned income (not passive income).
- They interact and cannot double-benefit the same income.
- Japanese tax is generally high enough that the FTC often helps — but model it.
How each works
The Foreign Tax Credit reduces US tax dollar-for-dollar by qualifying foreign income tax you paid, and unused credit can carry over. The Foreign Earned Income Exclusion instead excludes a limited amount of foreign earned income (wages/self-employment), but not passive income like dividends and capital gains. Because Japanese income tax is often substantial, many US filers in Japan rely on the FTC.
Choosing and combining
They interact: you cannot exclude income under FEIE and also credit the foreign tax on that same income. The right mix depends on your earned vs passive income, your Japanese tax paid, and factors like the child tax credit. Electing FEIE and later revoking it has consequences. This is a classic model-it-first decision for a US-Japan professional.
Who this is for
- US filers with Japanese salary
- Americans optimizing their US return
What this is not
- Non-US taxpayers
- FEIE and FTC cannot both benefit the same income; revoking FEIE has multi-year consequences — model it.
Frequently asked questions
How does tax residency work in Japan?
For tax, Japan classifies you as non-resident, non-permanent resident, or permanent resident — separate from your immigration status. Broadly: non-residents are taxed only on Japan-source income; non-permanent residents (in Japan under 5 of the last 10 years, without permanent intent) are taxed on Japan-source income plus foreign income paid in or remitted to Japan; permanent residents (for tax) are taxed on worldwide income. This affects foreign income and investments, so confirm your category with the NTA or a tax accountant.