You Make the Call - Nov. 12, 2026

Question: Nicholas, a U.S. citizen, works in Germany during 2026 and earns $160,000 of foreign wages. He is a bona fide resident of Germany throughout 2026 and has his tax home there, so he qualifies for, and elects, the foreign earned income exclusion (FEIE) on his 2026 Form 1040, U.S. Individual Income Tax Return. Nicholas paid $30,000 of German income tax on the full $160,000 of wages. How should the German income tax be treated for foreign tax credit (FTC) purposes in light of the FEIE?

Answer: Nicholas may claim the FTC only for German tax allocable to the foreign wages exceeding the amount excluded under the FEIE, subject to the applicable FTC limitation.

For 2026, Nicholas may exclude up to $132,900 of qualifying foreign earned income. Under §911(d)(6), Nicholas may not take a deduction, exclusion or credit to the extent it is properly allocable to income excluded under §911. Thus, the German tax attributable to the excluded $132,900 cannot be claimed as an FTC. However, he may be able to claim the credit for foreign tax allocable to the $27,100 of wages exceeding the excluded amount.

Since the German tax relates solely to Nicholas’s $160,000 of wages and there are no allocable business expenses, housing exclusion, housing deduction or other amounts that affect the formula, the allocation first calculates the portion of tax paid on the excluded amount:

Percentage of wages excluded: 83.0625% ($132,900 ÷ $160,000)

Percentage of wages not excluded: 16.9375% (100% − 83.0625%)

Foreign tax ineligible for the foreign tax credit (FTC): $24,918.75 ($30,000 × 83.0625%)

Foreign tax remaining for the FTC calculation: $5,081.25 ($30,000 × 16.9375%)

Of the $160,000 in German wages earned and $30,000 in German tax paid, Nicholas may use the FEIE to exclude $132,900 for 2026 and include $5,081.25 of German tax allocable to the $27,100 portion not excluded in his FTC calculation, subject to the applicable limitation.