FEIE or Foreign Tax Credit: A Scenario Worksheet for Digital Nomads

FEIE or Foreign Tax Credit. This worksheet organizes a side-by-side federal planning discussion. It does not promise a zero-tax result. First confirm eligibility, then compare treatments using the same income, filing status, tax year and documented foreign tax.

Start with the inputs, not the desired tax bill

Keep each input identical across scenarios unless the treatment itself requires a different calculation. Otherwise the apparent saving can come from inconsistent assumptions.

Scenario A: little or no qualifying foreign income tax

A credit requires qualifying foreign tax; a low-tax location does not manufacture one. If eligible, an exclusion may be relevant for foreign earned income. The remaining U.S. calculation still needs attention, including income outside the exclusion and any self-employment tax. Use the FEIE guide for limits and qualification.

Write down why a foreign-tax amount is zero: no liability, a timing difference, missing records or a tax that has not been classified. Those explanations are not interchangeable.

Scenario B: substantial foreign income tax

Prepare a credit-based scenario using the appropriate income categories and limitations. Do not compare a foreign headline rate directly with a U.S. marginal rate and assume one wins. Use the actual tax and income records. The IRS credit overview describes qualifying-tax considerations.

Ask the preparer to record any credit used, unused amounts and the reason for a limitation. A credit that cannot be used this year is different from one that permanently reduces this year’s bill.

Scenario C: mixed earned and investment income

Keep separate rows for wages or business earnings and for investment income. A single exclusion number is not an answer for the entire portfolio. Where exclusion and credit treatments interact, the foreign tax attributable to excluded income cannot also support a credit. Consult IRS Topic 856 rather than subtracting the full foreign tax bill from a post-exclusion calculation.

Illustration: a worksheet has one row for services income and one for dividends. Leave the tax-treatment columns unresolved until each category has been classified. This avoids silently treating both as foreign earned income.

Use a comparison sheet that exposes missing costs

Do not fill this sheet with the site’s full-year state savings estimate. It answers a different question and cannot calculate a federal return.

Check election history before changing course

The IRS exclusion-election guidance explains that choosing and revoking an exclusion can affect later years. Ask the preparer to compare the current year and any known upcoming change in work location or income. Do not revoke solely because a one-year spreadsheet looks attractive.

Bring prior returns, foreign tax records, work-location evidence and a list of expected changes. The useful output is a documented choice with assumptions, not a promise to pay nothing.

Sources and next steps

• IRS foreign tax credit
• IRS Topic 856
• IRS exclusion elections
• Foreign tax credit guide

Examples are hypothetical. A page, document or service cannot guarantee a tax result.