Every spring, thousands of Americans living abroad sit down with two tax returns and one confident belief: that the foreign tax credit will keep them from paying tax twice on the same income. The advice appears on expat forums, in Facebook groups, and even in some software prompts: claim the credit on your US return, claim it again on your local return, and you're covered. For a surprising number of people, that double claim is exactly the problem. The credit gets filed twice, the local tax authority applies its own rate to income the US already taxed, and the expat ends up writing a check they never expected.

The Double-Counting Trap in Expat Tax Returns

The trap has a deceptively simple shape. An American freelancer living in, say, Portugal earns income from a US client. The US taxes worldwide income, so the freelancer reports it on a US return. Portugal also taxes worldwide income for residents, so the same income appears on the Portuguese return. On the US return, the taxpayer claims a foreign tax credit for the Portuguese tax paid. On the Portuguese return, they claim a credit for the US tax paid. Each credit seems legitimate on its own.

But the two credits are not symmetrical. The US foreign tax credit is limited to the US tax on that foreign income, roughly the same rate the US would charge on domestic income. The Portuguese credit is limited to Portuguese tax on that income. When both countries tax the same dollars, the credits can overlap in ways that leave the taxpayer owing more than either country alone would demand. Some expats discover this only after the local tax authority sends a notice demanding the difference, plus interest.

The mistake is common enough that tax professionals have a name for it: the double-counting trap. A cross-border tax specialist in Lisbon told me she sees it in about a third of the American clients who come to her after filing on their own. The typical error is not fraud, but a misreading of how the credit interacts with the local tax system. The taxpayer assumes the US credit for local tax paid will satisfy the local authority's claim on the same income. It often does not.

The result is a bill at the second country's rate on income the first country already taxed. If the US rate is 24% and the Portuguese rate is 28%, the expat may end up paying the Portuguese 28% on the full amount, minus only a partial credit for US tax. That gap, a few percentage points on a year of freelance income, can run into the thousands. The advice to claim the credit twice backfires precisely because it ignores the order in which credits are applied.

How the Foreign Tax Credit Actually Works

The foreign tax credit is not a refund. It is a dollar-for-dollar offset against US tax on foreign-source income, but only up to the amount of US tax that income would generate. If an expat earns $50,000 abroad and the US tax on that income is $8,000, a foreign tax credit of $8,000 wipes out the US bill. If the foreign tax paid is $10,000, the extra $2,000 becomes an excess credit that carries forward to future years.

The limit is the key. The credit cannot reduce US tax on US-source income. That means a freelancer with both US and foreign clients must allocate income carefully. A common error is to claim the full foreign tax credit against a US tax bill that includes tax on US-source earnings. The IRS will disallow the excess, and the taxpayer owes the difference plus interest.

Calculating the limit requires a formula that involves foreign-source gross income, total gross income, and US tax before credits. For a freelancer with clients in three countries and a mix of business expenses, the math gets intricate quickly. Tax software can handle it, but only if the taxpayer enters the right categories. A mislabeled source, a wrong currency conversion, or a missed carryforward can tip the result.

Excess credits do carry forward, up to ten years. That sounds like a safety net, but it only helps if future foreign tax exceeds future US tax on foreign income. For an expat whose income grows, the carryforward may never be usable. For someone who moves back to the US, the credits often expire unused. The credit is a tool, not a guarantee, and its limits are where the double-counting trap begins.

The Two-Country Mismatch: Where the Error Creeps In

The trap deepens when the two countries have different rules for what counts as taxable income. The US taxes worldwide income of citizens and residents, no matter where they live. Many European countries also tax worldwide income of residents. But some, like Portugal under the NHR regime (now revised), tax only local-source income for certain newcomers. A freelancer who qualifies for local-source-only treatment may owe little or nothing locally, yet still claim a local tax credit on the US return.

That mismatch creates a double benefit. The US return shows a credit for local tax that was never actually paid, because the local rate was zero. The IRS treats that as an underpayment. Meanwhile, the local return, if the taxpayer is not on the local-source-only track, may show a credit for US tax that the US never collected, because the US credit already offset it. Each country sees a credit for tax the other country did not ultimately keep.

The IRS has become more aggressive about auditing these mismatches. A tax attorney in Berlin told me that US citizens abroad are a priority for automated matching programs, which compare foreign tax credits claimed on US returns with data from foreign tax authorities. A mismatch of even a few hundred dollars can trigger a notice. The audit rate for expats is higher than for domestic filers, in part because the foreign tax credit is so often misapplied.

When the second country applies its rate to income the first country already taxed, the result is double taxation in practice, even if the treaties were designed to prevent it. The error is not in the treaties but in the way the credits are claimed. The taxpayer files two returns, each with a credit, and the credits cancel each other out in a way that leaves a residual bill. The second country's rate applies to the first country's income, and the expat pays the difference.

Real-World Scenarios: Freelancers and Remote Workers

Consider a digital nomad who spends a year in Thailand, earning from a US platform and a German client. Thailand taxes local-source income for residents, but the US taxes worldwide income. The nomad claims a Thai credit on the US return, and a US credit on the Thai return. If the Thai rate is lower than the US rate, the US credit is limited to the Thai tax, and the US bill is the difference. If the Thai authority sees the US credit and reduces the Thai bill to zero, the nomad may owe nothing in Thailand but still owe US tax on the full amount.

A freelancer in Germany faces a different twist. Germany taxes worldwide income at progressive rates that can exceed US rates. The US credit for German tax may be fully used, but Germany's credit for US tax is limited to the German tax on that income. If the US tax is lower, Germany collects the difference. The freelancer ends up paying the German rate on income the US also taxed, with only a partial credit.

Remote employees for US firms are a third case. A person living in Spain, employed by a US company, has wages that are US-source for US tax purposes. Spain taxes the wages as local income. The US foreign tax credit does not apply to US-source wages. The taxpayer must claim the foreign earned income exclusion or a treaty position, not the foreign tax credit. Many remote workers discover this only after filing, when the IRS rejects the credit.

Each scenario has its own pitfalls, but the common thread is that the credit is claimed without verifying which country has the primary right to tax the income. Tax treaties often specify that, but the rules are dense. A typical effective tax rate for a freelancer in Germany might be 30–40%, while in Portugal it might be 20–30%, and in Thailand 10–20%. Those ranges matter because the credit limit is based on the US rate, which for a single filer in 2026 tops out around 37%.

The Cost of Getting It Wrong: Penalties and Interest

The financial cost of the double-counting trap goes beyond the extra tax. The IRS charges interest on underpayments, and that interest compounds daily. For a tax bill that should have been paid a year earlier, the interest can add 8–10% of the balance. Penalties for underpayment, if the IRS determines negligence, can add another 20% of the underpaid amount. A $5,000 error can turn into a $7,000 bill.

Audit risk increases with the complexity of the return. A US expat who claims a foreign tax credit and also claims the foreign earned income exclusion is a red flag. The IRS has a dedicated unit for international individual returns, and it routinely sends letters asking for proof of foreign tax paid. A taxpayer who claimed a credit for tax that was never paid, because the local return showed a credit for US tax, will have a hard time explaining the mismatch.

Amended returns are often the only fix, but amending a US return requires recalculating the credit limit and possibly the carryforward. Amending the local return may be necessary too, which means dealing with two tax authorities and two sets of deadlines. A tax professional in London told me that a typical fix for a double-claimed credit takes three to six months and costs several thousand dollars in professional fees, on top of the tax owed.

The worst case is outright double taxation. If the local authority refuses to accept the US credit, and the IRS disallows the local credit, the same income is taxed twice. That outcome is rare but not hypothetical. A freelancer with a poorly documented credit claim in a country with aggressive collection practices could end up paying both rates in full. The treaties are supposed to prevent this, but they only work if the taxpayer files correctly.

Practical Fixes: How to File Correctly the First Time

The first fix is to stop claiming the credit on both returns without checking the source of income. A US expat should determine whether the income is US-source or foreign-source under US rules. If it is foreign-source, the foreign tax credit may apply. If it is US-source, the foreign earned income exclusion or a treaty position is the better tool. The local return should claim a credit only for US tax actually paid on income the local country has the right to tax.

Tax software with foreign income support can help, but it is not a substitute for judgment. Programs like TurboTax and H&R Block offer expat editions, but they rely on the taxpayer answering source questions correctly. A misstep in the interview can lead to a wrong credit claim. A cross-border tax specialist, even for a one-hour review, is often worth the fee. The American Citizens Abroad and similar groups maintain directories of qualified preparers.

Track income source carefully throughout the year. Keep a spreadsheet of each client, the country where the work was performed, the country where the payment originated, and any tax withheld. That documentation is what you will need to support a credit claim on either return. Without it, you are guessing, and the guess is where the trap waits.

File separate returns for each country, and do not assume the credits will match. The US return and the local return are independent filings. Each country applies its own rules. The goal is not to make the credits equal but to ensure that each credit is valid and limited to the tax actually paid to the other country. A careful filer will often find that only one credit is usable, and the other country's tax is offset by a treaty provision, not a credit.

Rethinking the Advice: When the Credit Isn't Worth It

The foreign tax credit is not always the best tool. For many expats, the foreign earned income exclusion, which allows a US citizen to exclude roughly $120,000 (as of 2024) of foreign earned income from US tax, is more beneficial. The exclusion reduces US tax to zero for most freelancers, which means the foreign tax credit has nothing to offset. Claiming the credit in that situation is pointless and can create a carryforward that expires unused.

A treaty-based position can also be superior. Some treaties allow an expat to claim that a particular type of income is taxable only in the country of residence, eliminating the need for a credit. This is common for pension income, dividends, and some business income. A tax specialist can help identify whether a treaty article overrides the default credit approach. The choice is not one-size-fits-all.

Consider the total tax burden, not just the US side. A freelancer in a high-tax country like Denmark or Sweden may pay 40–50% in local tax. The US credit will offset most of that, but the excess credit may be unusable. The foreign earned income exclusion, by contrast, lowers the US tax base, but it does not reduce local tax. The best strategy depends on which country's rate is higher and how much income is involved.

The advice to claim the foreign tax credit twice is wrong because it treats the credit as a simple refund. It is a mechanism with limits, and those limits are where the trap lives. The revisionist take is that most expats should not claim the credit at all. They should either exclude the income or rely on a treaty, and only use the credit when the foreign tax rate clearly exceeds the US rate on that income. That tailored approach, not a generic instruction, is what avoids the second-country rate on the first country's income.

This article is for informational purposes only and does not constitute tax, legal, or financial advice. Consult a qualified professional for your specific situation.