Foreign Earned Income Exclusion VS Foreign Tax Credit

My husband and I (both US citizens) moved to the UK on Aug 31, 2009. Since we do not meet the qualifications for bona fide residence or physical presence, we cannot take the FEIE if we file by April 15.

It appears we have two choices:

1. File for an extension, and take the FEIE after we have been out of the US for 330 days.

2. File by April 15, and take the Foreign Tax Credit instead.

My husband’s foreign earned income (from Sep 09-Dec 09) falls well below the $91,500 limit, and is about 25% of our total worldwide income for the year. (I did not earn any foreign income.)

I have two questions:

1. Is there any advantage to filing for the extension and taking the FEIE, over simply taking the FTC?

2. If we file by April 15 and take the FTC, would we then be unable to take the FEIE for the next five years?

To complicate matters, there is a possibility that my husband may leave his job before the 330-day period. In that case:

a. If we had filed an extension in order to meet the FEIE requirements, but end up returning to the US before 330 days, can we then file and just take the FTC?

b. If we are not working, can we travel throughout Europe/Asia (not US) for the remainder of the 330-day period, and still qualify for the FEIE? (He has a Tier 1 visa, so it is not tied to his current job.)

I would be very grateful if anyone could shed some light on these issues!

1. Is there any advantage to filing for the extension and taking the FEIE, over simply taking the FTC?

2. If we file by April 15 and take the FTC, would we then be unable to take the FEIE for the next five years?

To complicate matters, there is a possibility that my husband may leave his job before the 330-day period. In that case:

a. If we had filed an extension in order to meet the FEIE requirements, but end up returning to the US before 330 days, can we then file and just take the FTC?

b. If we are not working, can we travel throughout Europe/Asia (not US) for the remainder of the 330-day period, and still qualify for the FEIE? (He has a Tier 1 visa, so it is not tied to his current job.)

I would be very grateful if anyone could shed some light on these issues!

1.  FEIE is better from a simplicity point of few, most people find.
2.  You could still take FEIE next year if you wanted.  If you elected to take FEIE, then elected not to take it, then you would have to wait 5 years to take it again.  If you don't elect to take it the first year, you still have flexibility going forward.
a.  Yes, if you don't meet 330, then you do FTC only.
b.  As long as your tax home is still outside the US.

Sara Smile, thank you so much for answering my questions; I really appreciate your help!

Just to follow up:

1. That surprised me, as it sounds simpler to just take the FTC and be done with it, rather than file for an extension. (I imagine Form 1116 is more difficult to complete than Form 2555?)

Simplicity matters aside, is either the FEIE or FTC generally considered more advantageous financially?

b. I guess the "tax home" issue would be reason to keep our UK flat, even if we travel extensively.

You are right.  The 1116 is harder than 2555.  For the 1116 most people cannot do this by hand and would need tax software.

You can't say that FEIE or FTC is better, it depends on your circumstances and can vary.  Cutting to the chase, as long as the FTC covers your US liability in full, FTCs are fine.  You might need to consider FEIE if you don't have enough FT.

Thanks, Sara. I was actually entertaining the notion of doing both forms by hand to see which scenario was better. 

I had to do both the 1116 and the 2555 this year.  I would definitely try to do just the 2555 if you can. 

Thanks for the advice, geeta!