Sky, what you call the "exemption" (actually an exclusion) reduces AGI, and thus helps to reduce your state income tax. Also, the true tax "exemption" (foreign tax credit - offsets foreign taxes actually paid) doesn't quite cover everything for various reasons. Net result is you'll pay quite a bit less with the exclusion - if you can qualify - even using the foreign tax credit. If your legal US residence is in a state with no income tax, or you actually live overseas, then the effect isn't as pronounced.