FEIE vs Foreign Tax Credit for Americans in Spain

Victor Gersten, EA, CFP®, MS, MPAS™

The United States taxes its citizens on worldwide income, wherever they live. Spain taxes its residents the same way. So the same euro can be taxed twice.

Two tools exist to stop that. The Foreign Earned Income Exclusion, and the Foreign Tax Credit. Most people have heard of the first and default to it.

For an American living in Spain, that default is often wrong. Here is how each one works, and how to tell which fits your situation.

Why you are exposed to both systems

As a US citizen or green card holder, you report worldwide income and file a US return every year. That does not change when you move. It includes income you earn in Spain.

Spain taxes residents on worldwide income too. You are generally a Spanish tax resident if you spend more than 183 days there in a calendar year. You are also resident if Spain is the main base of your economic interests.

So both countries have a claim. The tools below decide who gets paid, and how much.

The Foreign Earned Income Exclusion

The exclusion lets you leave a limited amount of foreign earned income out of your US taxable income. For 2026 the maximum is $132,900 per qualifying person. For 2025 it was $130,000.

That figure is per person, not per return. A married couple where both spouses qualify can each exclude up to the limit against their own earned income. One spouse cannot use the other’s allowance.

How to qualify

You need foreign earned income, a tax home in a foreign country, and one of two tests.

The bona fide residence test. You are a bona fide resident of a foreign country for an uninterrupted period that includes a full tax year.
The physical presence test. You are physically present in a foreign country for at least 330 full days in any 12 consecutive months.

You claim it on Form 2555, and you keep records that support the residence or the day count.

The word doing the work is earned

This is where the exclusion disappoints people.

Earned income means wages, salaries and professional fees for services you performed. It does not cover pensions. It does not cover Social Security, dividends, interest, capital gains, rental income or IRA distributions.

So a retiree in Valencia living on a 401(k) and Social Security typically gets nothing from the exclusion. Neither does someone living on investment income. That is the single most common misunderstanding on this topic.

The Foreign Tax Credit

The credit works differently. It does not remove income from the calculation. It reduces your US tax by the foreign income tax you actually paid or accrued on the same income.

You claim it on Form 1116.

The credit reaches far more types of income than the exclusion. Pensions, dividends, interest, capital gains and rental income all qualify. That is why it tends to be the right tool for retirees.

Spain also helps here, in an odd way. Spanish tax rates are generally higher than US rates at comparable income levels. So the credit often wipes out the US liability entirely, and can leave carryforward to use in later years.

Which one should you use?

You cannot claim the credit on income you have already excluded. So the two do not stack on the same money.

As a rough guide:

Your situation	Usually better
Working in a low-tax country, salary under the limit	Exclusion
Working in Spain, where local rates are high	Credit
Retired, living on pensions and investments	Credit, since the exclusion does not reach that income
Self-employed abroad	Depends, and watch the point below

One trap for the self-employed. The exclusion reduces income tax. It does not reduce US self-employment tax. So a freelancer can exclude their income and still owe self-employment tax on it. The totalization agreement is what solves that, not the exclusion.

Another point worth knowing. Revoking an exclusion election has consequences for future years. You generally cannot claim it again for five years without IRS consent. So this is not a choice to flip annually on a whim.

The Beckham regime changes the arithmetic

If you moved to Spain for work, the impatriate regime may apply. It taxes you on a non-resident basis at a flat rate on Spanish employment income.

That sounds attractive, and for a US citizen there is a catch. A lower Spanish bill means less foreign tax to credit against your US liability. So you can reduce your Spanish tax and increase your US tax by roughly the same amount.

Whether it helps depends on your numbers. The Beckham Law in 2026 works through both sides.

Social Security and the totalization agreement

If you are self-employed, or working for a US employer while living in Spain, you could face social security contributions in both countries.

The US-Spain totalization agreement prevents that. It assigns you to one system. To rely on it you need a certificate of coverage from whichever country covers you.

Request it when you register, not when the return is due. The US-Spain Totalization Agreement covers the detail.

What to keep

Whichever route you take, the paperwork matters.

Records of all income, by source and country.
Proof of foreign taxes paid, with dates.
Day counts and travel records if you rely on the physical presence test.
Your certificate of coverage, if one applies.
Copies of both returns, so the two agree with each other.

Working with a cross-border adviser

The decision between the exclusion and the credit is a calculation, not a preference. It should be run on your actual numbers, both ways, before the return is filed.

That calculation also interacts with the rest of your plan. Which account you draw from changes the income mix. The income mix changes which tool works better. And a Beckham election changes both.

Cross Border Wealth Advisors is a fee-only fiduciary firm serving US citizens living in or moving to Spain. I hold both the CFP® certification and an Enrolled Agent license, so the return and the plan get built on the same assumptions.

We do not prepare returns in house. We work out the position and coordinate with the preparers on each side, so the two returns agree.

Everything above is general information, not advice about your return. To talk it through, book an introductory conversation at cbwealthadvisors.com or email info@cbwealthadvisors.com.

Frequently Asked Questions

Can I use both the exclusion and the credit?

Yes, but not on the same income. You might exclude salary and claim the credit on investment income in the same year.

Does the exclusion cover my pension?

No. It only covers earned income, meaning payment for services you performed. Pensions, Social Security and investment income fall outside it.

Which is better for a retiree in Spain?

Almost always the credit, because retirement income is not earned income and the exclusion cannot reach it.

Will I owe US tax at all?

Often not. Spanish rates are generally higher, so the credit frequently covers the US liability. You still have to file.

Sources

Choosing between the exclusion and the credit is one decision inside a larger pre-move picture. The rest is in Five Financial Mistakes Americans Make Before Moving to Spain.

Disclosures

This article is general educational information published by Cross Border Wealth Advisors, a company of Gersten Financial Planning Inc., an investment adviser registered with the State of California (CRD 309890). It is not investment, tax, legal or immigration advice.

Rules and figures change. The ones here are stated as of the date above. Cross Border Wealth Advisors is fee-only and receives no commissions. Registration does not imply a certain level of skill or training.

Please read the full article disclosures, which apply to everything published here.

FEIE or Foreign Tax Credit: Which One Should You Use?