Let's turn our attention briefly now to foreign tax issues, we can really only cover this on a very high level because it differs quite a lot depending on the actual tax situation on the ground in that particular country. But we can give you an idea what it looks like in general if you're going to be subject to foreign tax in another country. So generally, if you're staying somewhere longer term or setting up a base there, there's a chance that you could be subject to the taxes in that country. If you are paying for in taxes, usually it means that you'll claim them as a credit to offset your US tax in the language of tax professionals. We're probably the only people that are this specific about it, but we want to make a distinction between for example, and exclusions. From income such as the foreign earned income exclusion, and a credit such as a foreign tax credit, so an exclusion just basically subtracts from taxable income.

So it's like negative income. And that's what the Foreign Earned Income Exclusion does. And that can be applied whether or not you're paying for in taxes. If you are paying for in Texas, however, the way a credit works is it's applied as $1 for dollar reduction of your US tax liability, if you have any. And I have a couple of examples of what it looks like, depending on if you do have income above the Foreign Earned Income Exclusion amount or if you don't. What you want to keep in mind here though, is work with a tax professional to ensure your foreign tax credits are applied correctly.

Because generally speaking, you shouldn't be subject to double tax, but it's very possible if you're living In a higher tax jurisdiction, that you would end up paying the higher of the two effective tax rates. So let's look here at a couple of very simple examples. One have a lower tax country and one have a higher tax country. So let's imagine an individual with $100,000 of foreign earned income. And in both of these cases, of course, their income is below the exclusion amount. So they actually don't have any US tax due.

Let's imagine this person is an employee not self employed to just keep our example simple. So the US tax is zero. But because of their other circumstances, they happen to be subject to tax in a foreign country. So in this case, the lower tax country is applying tax at an average rate of 10%. So the individual pays the equivalent of $10,000 to the foreign country. So the net results for that guy He just pays the 10,000 to the foreign country.

And in fact, the exact same is true of the higher tax country. The hundred thousand dollars is excluded from us income tax, so his US tax is zero. But he ends up paying the higher tax of that country that he lives in. Hopefully, it's a wonderful place to live and those taxes are going to some great social benefits. But the reality is he just pays the 35,000 in foreign taxes. Now let's look at an example where it gets a little bit more complex when an individual has income above the foreign income exclusion amount.

So again, we have a low tax country and a high tax country. In the lower tax country, again, the tax is still the same rate. So it's a 10% on the 200,000 of foreign earned income, the foreign tax applied is 20,000 USD equivalent, but because this individual has income above the exclusion amount, they're going to owe us income tax as well. So the US tax in this example, let's say $24,000. So foreign tax credit is applied. Now he does not get a full foreign tax credit for the 20,000.

And that's because when you are using the foreign income exclusion, you have a scaled down of your foreign taxes. So in other words, you can't claim a credit and an exclusion on the same income. Just double dipping, that's not allowed. So in this case, $10,000 of the foreign tax credit is applied as a credit. The actual US tax that he ends up going after that is 14,000 is 24,000. Less than 10,000 credit, and then that's total tax that this person pays worldwide is 34,000.

In the higher tax country example, and again, the tax rate is the same it's 35%. So on 200,000, the foreign taxes are 70,000 The US income tax after the foreign income exclusion, again is the same. It's the 24,000 in this example. Now, in this case, because the foreign taxes are so much higher, even with the scale down in place, this person gets the full amount of their US tax is eliminated using the foreign tax credits. So they don't pay any additional US tax. But the net result is their total tax is the 70,000 that they paid in the higher tax jurisdiction.

So that's just a high level Look, it can certainly get a lot more complicated depending on different types of income and how different countries tax different types of income. So you definitely need to work with a tax professional to make sure you get this right. But just so you understand at a high level if you're going to be subject to foreign tax, how does it interact with you us income tax, and what you can generally expect