FEIE vs FTC for H-1B and F-1 Income from India: Guidance

For thousands of H-1B immigrants and F-1 international students who still earn money from India, the decision between the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC) is far more than a line on a tax form — it can change your yearly tax bill, your mortgage options, and even how you plan for a future green card.

The United States taxes worldwide income, which means salary from earlier work in India, rental income from family apartments, interest from NRE/NRO accounts, and returns from family-held investments all feed into a U.S. tax return once a person becomes a U.S. tax resident. The key choice becomes whether to use the FEIE via Form 2555 or the FTC via Form 1116. You cannot double-count: income you exclude under FEIE cannot also create foreign tax credits, and that single rule drives most real-world planning.

FEIE vs. FTC — basic differences and when each applies

• FEIE (Form 2555)
  • Best for earned wages from work performed abroad.
  • Requires meeting a time-based test (physical presence or bona fide residence).
  • Excludes eligible earned income up to an annual cap (see cap below).
  • Excluded income cannot generate FTC.
• FTC (Form 1116)
  • Applies to foreign taxes paid on many types of foreign income — both earned and passive (rent, interest).
  • Reduces U.S. tax directly by the amount of foreign tax paid (subject to limits).
  • Unused credits may carry forward, helping multi-year planning.
  • Does not hide income; it keeps the income visible on the U.S. return while reducing tax liability via credits.

Why this matters: FEIE often works best for wages tied to physical work abroad, while FTC is the primary tool for passive income (rent, interest) that India may have taxed.

How visa status affects tax residency and access to FEIE/FTC

• H-1B workers
  • Typically become U.S. tax residents after meeting the IRS Substantial Presence Test.
  • Must report worldwide income, including India income streams.
  • May claim FEIE for wages performed abroad if they meet the FEIE time tests.
  • Pay into U.S. Social Security and Medicare (separate from FEIE/FTC).
• F-1 students
  • Usually treated as nonresident aliens during their first five calendar years in the U.S.
  • Nonresident status generally blocks FEIE during that period.
  • Can still report and claim FTC on India-source passive income taxed by India.
  • May become U.S. tax residents after the five-year exception or by meeting the Substantial Presence Test, at which point worldwide income reporting begins and FEIE may become available for eligible wages.

For details on the residency test, see the IRS explanation of the Substantial Presence Test: Substantial Presence Test.

Filing mechanics and recordkeeping

• FEIE is claimed on Form 2555: About Form 2555.
• FTC is claimed on Form 1116: About Form 1116.

Both forms require careful documentation:
– FEIE: where and when you worked abroad, days/location evidence.
– FTC: exact foreign tax amounts paid, income categories, and currency conversion records.
– Never claim FTC on income already excluded by FEIE.

Common income mixes and typical choices

Most Indian-origin filers fall into common patterns:

• Prior salary from India (earned wages)
• Rent from family-owned apartments (passive)
• Interest from NRE/NRO accounts (passive)

Typical approaches:
– FEIE often used for prior salary if conditions are met.
– FTC typically used for rent and interest.
– Mixed-income households often use both: FEIE for eligible wages + FTC for passive income.

Warning: FEIE does not apply to passive income. Ignoring FTC and relying only on FEIE can produce double taxation on passive streams.

Money outcomes — when one tool beats the other

Key drivers:
– Foreign vs. U.S. tax rates
– If India taxes wages at high rates, using FEIE will lose the benefit of those Indian tax payments (no FTC for excluded income).
– If Indian taxes are low on a given income, FEIE can remove eligible wages from U.S. tax up to the cap, often more helpful than a weak FTC.

• Income visibility
  • FEIE lowers reported taxable income (good for lower taxes now, bad for mortgage qualifying).
  • FTC leaves income visible but reduces tax owed (often better for loan underwriting and immigration review).
• Carryforwards
  • FTC can carry forward unused credits, useful when foreign tax payments vary year-to-year.

Example outcomes:
– High Indian salary taxed heavily: FTC might preserve tax value, but credits can be unused if U.S. tax is low.
– Low-tax Indian income: FEIE may be advantageous for eligible wages.
– Mixed income: FEIE for wages + FTC for passive income is often optimal.

Practical planning notes and warnings

• FEIE cap: The FEIE has an annual dollar limit. The article references $130,000 (2025 limit) for eligible earned income. Salary above that remains potentially taxable in the U.S. unless offset by FTC.
• Mortgage and immigration effects
  • FEIE reduces taxable income figures banks and immigration officers see.
  • FTC preserves income on paper while reducing tax — often preferable before mortgages or green card filings.
• Documentation
  • Keep India tax returns, receipts, TDS certificates, bank statements showing interest and withholding.
  • Keep currency exchange records and be consistent in conversions.
  • Track dates of U.S. tax residency start if switching status midyear.
• Remote work and FEIE
  • FEIE depends on work performed abroad, not just where payment was received.
  • Track days and locations carefully for any remote work across borders.

Filing & tracking checklist (practical steps)

1. Maintain a ledger for India taxes paid:
   • Date, rupee amount, type of income, exchange rate used.
2. Mark each income stream as earned or passive.
3. If changing residency midyear, model both outcomes:
   • What the return looks like with FEIE for eligible salary.
   • What the return looks like with FTC and possible carryforwards.
4. Consider sequencing:
   • Decide whether you prioritize lower tax now (FEIE) or stronger reported income (FTC) for upcoming mortgage or immigration events.
5. Keep copies of all supporting India documentation (returns, TDS, receipts).

Examples that clarify the rules

• H-1B software engineer who moved in July:
  • Final India salary may qualify for FEIE if time tests are met.
  • Rent and interest cannot use FEIE — FTC is the tool to claim Indian tax paid on those.
  • High Indian rent tax vs. lower U.S. tax can lead to FTC carryforwards.
• F-1 graduate student in year three:
  • Nonresident status blocks FEIE.
  • Rent from India is reported and FTC is used to offset Indian tax on that rent.
  • Once the student becomes a U.S. tax resident, worldwide income reporting begins; FEIE may apply to eligible earned income thereafter, but rent remains passive and points to FTC.

Common pitfalls to avoid

• Assuming FEIE applies during F-1 nonresident years — it usually does not.
• Trying to use FEIE for passive income.
• Failing to track dates of residency and the location of work performed.
• Missing India tax documentation or exchange-rate records.
• Ignoring required reporting for Indian mutual funds or foreign businesses, which can trigger extra U.S. reporting rules, audits, penalties, or immigration delays.

Community context and longer-term considerations

India’s rental and investment income often remains a steady connection for families after moving to the U.S. U.S. worldwide taxation means India stays central to tax planning long after the move. As India’s global talent pool grows, demand for cross-border tax services rises to align Indian assets with U.S. reporting.

Decisions are often driven by life goals:
– A young H-1B family planning to buy a home may choose FTC to show higher income for underwriting, accepting a bit more tax now.
– A worker with modest India wages and little India tax paid may prefer FEIE to remove eligible wages from U.S. tax.
– F-1 students in nonresident years must document passive income and prepare FTC claims; once residents, they can reconsider FEIE.

Three habits that lead to better outcomes

1. Decide early in the year whether you prioritize lower tax now (often FEIE for wages) or stronger reported income (often FTC) and stick to that plan unless facts change.
2. Keep bright lines between earned and passive income from India; don’t try to shoehorn passive income into FEIE.
3. Write a short note each time you pay India tax or receive India income (type, source, amount, exchange rate). That note will save hours later and reduce risk.

Official resources

• IRS Substantial Presence Test: Substantial Presence Test
• Form 2555 (FEIE): About Form 2555
• Form 1116 (FTC): About Form 1116

Key takeaway: FEIE is for earned income from work performed abroad and lowers taxable income up to its cap; FTC credits foreign tax paid on all types of foreign income and can carry forward. You cannot use both on the same income. The best outcomes come from clean records, clear goals, and planning that matches tax rules to life events like home purchases or green card timelines.