Both tools keep you from paying tax twice on Canadian wages. Because Canadian tax is usually higher than US tax, the credit often wins in Canada, and it keeps the refundable child tax credit available.
Lou is a tax-preparation tool, not a tax advisor. This article explains general rules for US citizens and green card holders who live in Canada. For advice on your situation, work with a qualified tax professional.
Americans living abroad have two main ways to avoid paying tax on the same income twice. Canada makes the choice easier than most countries do.
The two tools#
Foreign tax credit (Form 1116). You report the income, then subtract the Canadian tax you paid from your US tax. Unused credit carries back one year and forward up to 10 years.
Foreign earned income exclusion (Form 2555). You leave a limited amount of foreign wages out of US income. The limit is $130,000 for 2025, $126,500 for 2024 and $120,000 for 2023. It covers earned income only, not interest, dividends or most pensions.
You can use both on different income, but the tax on excluded income cannot also be credited.
Why the credit often wins in Canada#
- Canadian tax is usually higher. The credit tends to wipe out the US tax on the same wages, and any leftover builds up as carryover for later years.
- The refundable child tax credit. If you file Form 2555, you cannot claim the refundable part of the child tax credit. With the credit approach, families can sometimes receive it.
- It covers more kinds of income. The exclusion is for earned income. The credit also works on investment income and pensions.
- It is harder to undo the exclusion. If you claim the exclusion and later revoke it, you generally cannot claim it again for five years without IRS approval.
When the exclusion can make sense#
If your Canadian tax is low compared with your US tax, the credit may not cover everything, and the exclusion can help. It requires that you pass either the bona fide residence test or the physical presence test, and there are rules for part-year periods and for housing amounts.
It depends on your numbers. Run both before you choose.
What about CPP and EI?#
Canada Pension Plan, Quebec Pension Plan and Employment Insurance premiums are not income tax and cannot be credited, because of the US-Canada Totalization Agreement. They are not part of the comparison. See the CPP, QPP and OAS guide.
Where Lou fits#
Lou fills Form 1116 by default and also supports Form 2555, including the physical presence test and the housing exclusion. Details on the credit are in the foreign tax credit guide.
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