When choosing between the foreign earned income exclusion and foreign tax credit, it is an easy choice to use the credit only if you didn’t earn any wages and received only retirement income. On the other hand, if you didn’t pay any taxes to your foreign country and you did earn income, the exclusion is the better choice. Further, depending on your income and the rate of tax in your resident country, it may make more sense to use a combination of the exclusion and credit; then again, it may not. Either way, a proper analysis and comparison are recommended to determine what is most beneficial for the current tax year (but also prospectively for future years).
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