The Association of Americans Resident Overseas (AARO) estimates that 5.5 million Americans live abroad, facing taxation by both their country of residence and the United States.
The Foreign Earned Income Exclusion, Foreign Tax Credit, and tax treaty benefits can eliminate or substantially reduce this double taxation. Compare our best tax relief services to find expert support designed for expat tax situations.
Key Insights
- The Foreign Earned Income Exclusion allows qualifying expats to exclude up to $126,500 (2025) of foreign wages from U.S. taxation.
- Foreign Tax Credits provide dollar-for-dollar reductions of U.S. tax liability for foreign income taxes paid, often benefiting high earners more than FEIE.
- Americans must file FBAR reports when foreign accounts exceed $10,000 aggregate value, with penalties reaching $100,000 or 50% of the account balance for willful violations.
- The physical presence test requires 330 full days in foreign countries during any 12 months to claim FEIE.
U.S. Tax Obligations for Expats: Understanding Worldwide Income Taxation
The United States is one of only two countries that taxes citizens based on citizenship rather than residence, requiring Americans abroad to file U.S. tax returns and report all worldwide income.
U.S. citizens and green card holders must file annual tax returns if their worldwide income exceeds the IRS filing thresholds, even when living permanently overseas. For 2025, the thresholds are $14,600 for single filers under 65, $29,200 for married filing jointly, and $21,900 for head of household.
The Double Taxation Problem
Without relief provisions, Americans abroad pay income tax to both their country of residence and the United States on the same earnings. An American software engineer in Berlin earning €80,000 ($87,000) pays German income tax of approximately €24,000. Without U.S. tax relief provisions, she would also owe U.S. federal tax on that $87,000.
The most common misconception I encounter is that expats believe paying foreign taxes exempts them from U.S. filing requirements. You must always file a U.S. return, but the Foreign Earned Income Exclusion and Foreign Tax Credit typically eliminate or drastically reduce actual tax owed. Failing to file costs clients an average of $3,000-8,000 annually in missed tax relief.
Foreign Earned Income Exclusion (FEIE): How to Qualify and Claim It
The Foreign Earned Income Exclusion allows qualifying Americans to exclude up to $126,500 (2025) of foreign wages from U.S. taxation.
FEIE Eligibility Requirements
To claim FEIE, you must meet three requirements: tax home in a foreign country, foreign earned income, and either the physical presence test or bona fide residence test.
- Tax home requirement: Your regular place of business or employment must be located outside the United States. Tourist travel or temporary assignments don't establish a foreign tax home.
- Physical presence test: Be physically present in foreign countries for at least 330 full days during any 12 months. Days in international waters, in transit over the U.S., or on U.S. soil don't count.
- Bona fide residence test: Establish bona fide residence in a foreign country for an uninterrupted period that includes an entire tax year, demonstrating genuine residency intent through long-term housing and local community ties.
What Income Qualifies for FEIE
FEIE applies only to earned income from employment or self-employment services performed in foreign countries.
Qualifying income:
- Wages from foreign employers
- Self-employment income from services abroad
- Professional fees earned overseas
- Bonuses tied to foreign work
Income that doesn't qualify:
- Investment income
- Pension distributions
- Social Security benefits
- Rental income
I frequently see expats mistakenly try to exclude their worldwide passive income, which triggers audits and penalties.
How to claim: File Form 2555 with your annual tax return. The exclusion amount is prorated if you qualify for less than a full year.
Foreign Tax Credit (FTC): When It's Better Than FEIE
The Foreign Tax Credit provides a dollar-for-dollar reduction of U.S. tax liability for foreign income taxes paid, often benefiting high earners more than FEIE. Unlike FEIE, the Foreign Tax Credit doesn't exclude income, but reduces your U.S. tax by the amount of foreign taxes already paid.
Example: You earn $150,000 and pay $35,000 in Japanese income tax. Your U.S. tax would be approximately $33,000. The Foreign Tax Credit eliminates all U.S. tax and creates a $2,000 credit carryforward.
FEIE vs. FTC: Which Strategy Saves More
My methodology focuses on three factors:
Income level
Foreign tax rate
Income composition
If you earn under $126,500 in a country with tax rates below 20%, FEIE typically wins. Above $150,000 in high-tax countries like Germany or Japan, FTC usually provides greater savings.
Pro tip: Claim the Foreign Tax Credit using Form 1116. You can carry back excess foreign tax credits one year or carry forward ten years.
Reporting Requirements: FATCA, FBAR, and Foreign Asset Disclosures
Beyond income tax returns, Americans abroad face additional reporting obligations for foreign financial accounts and assets.
FBAR: Foreign Bank Account Reporting
FinCEN requires Americans to report all foreign financial accounts if the aggregate value exceeds $10,000 at any point during the year. File FinCEN Form 114 electronically by the tax deadline (with automatic extension to October 15).
Reportable accounts include:
- Foreign bank accounts
- Brokerage accounts
- Pension accounts with cash value
- Life insurance with cash surrender value
- Accounts where you have signature authority
FBAR penalties range from $10,000 per violation (non-willful) to the greater of $100,000 or 50% of the account balance (willful).
FATCA: Foreign Account Tax Compliance Act
Form 8938 must be filed with your tax return if your foreign assets exceed these thresholds:
Single filers:
- $200,000 on last day of year, OR
- $300,000 at any time during year
- $400,000 on last day of year, OR
- $600,000 at any time during year
FBAR vs. FATCA
Foreign Bank Account Report (FBAR) reports accounts to FinCEN (Treasury), while FATCA reports assets to the IRS. Different forms, different thresholds, different penalties. Missing FBAR carries criminal prosecution risk, while missing FATCA triggers civil penalties starting at $10,000 per form.
The U.S. maintains tax treaties with dozens of countries, providing additional relief beyond FEIE and FTC. Claiming treaty benefits requires filing Form 8833.
Common Tax Relief Scenarios for Different Expat Situations
Remote Workers for U.S. Companies
Americans working remotely from abroad for U.S. employers can claim FEIE if they meet physical presence or bona fide residence tests. The key factor is where you physically perform the work, not where your employer is located.
U.S. employers may continue withholding U.S. taxes, but you'll receive a tax refund when filing.
Self-Employed Expats
Self-employed Americans can exclude foreign-earned income through FEIE, but self-employment tax (15.3%) still applies unless you live in a country with a totalization agreement. For self-employed expats, the strategy depends on your totalization agreement status.
If your country has an agreement, get a certificate of coverage to avoid double social security taxation. Without an agreement, consider the S-corporation structure once earnings exceed $100,000.
Dual Citizens
Dual citizens with U.S. citizenship must file U.S. tax returns regardless of where they were born or raised. Many successfully use FEIE or FTC to eliminate U.S. tax liability, but compliance costs create burdens even when no tax is owed.
How to File U.S. Taxes from Abroad
Step 1: Know Your Filing Deadlines
Americans abroad automatically receive a two-month tax extension to June 15 for filing tax returns. You can extend further to October 15 by filing Form 4868. However, any taxes owed remain due by the original April deadline.
Step 2: Convert Foreign Income to U.S. Dollars
Report all foreign income and expenses in U.S. dollars using the Treasury Department's yearly average exchange rates or another reputable source like OANDA or XE.
Step 3: Decide Between Professional Help and Self-Filing
I recommend hiring tax professionals when your situation includes:
- Self-employment income
- Significant passive foreign income
- First-year expat filing
- Foreign pension plans
- Aggregate foreign assets exceeding $200,000
Average expat tax preparation costs range from $500-1,500, while self-preparation software costs $100-300.
Conclusion: Leverage Relief Programs to Stay Compliant
Americans living abroad can avoid double taxation by using the Foreign Earned Income Exclusion, Foreign Tax Credit, and tax treaties. These programs allow most expats to eliminate or substantially reduce their U.S. tax liability, provided they meet eligibility requirements and file the necessary forms.
To maximize relief, expats should determine the best exclusion or credit for their situation, keep detailed records of foreign taxes and time spent abroad, and file required FBAR and FATCA reports. Professional tax guidance is often valuable for ensuring compliance and optimizing tax outcomes.
Methodology
- Data sources: FEIE exclusion amounts, FBAR thresholds, and FATCA filing requirements compiled from IRS Publications, FinCEN FBAR guidance, and Treasury Department FATCA regulations as of 2025.
- Expert review: All tax relief strategies, qualification requirements, and penalty information were reviewed by Orville Marshall, Enrolled Agent with over 10 years of experience specializing in expat tax preparation.
- Limitations: Tax situations vary significantly based on income sources, foreign country of residence, and individual circumstances. FEIE and FTC benefits depend on foreign tax rates, income levels, and proper documentation.
- Transparency note: BestMoney.com provides general tax guidance and does not constitute professional tax advice. Readers should consult qualified tax professionals for personalized recommendations.
Frequently Asked Questions
1. Do I have to file U.S. taxes if I already pay taxes in my country of residence?
Yes, U.S. citizens and green card holders must file U.S. tax returns reporting worldwide income regardless of foreign tax payments. However, FEIE and FTC typically eliminate or reduce U.S. tax owed.
2. Can I use both FEIE and FTC on the same income?
No, you can't claim both on the same income. However, you can use FEIE on earned income and FTC on passive income, or FEIE up to the exclusion limit and FTC on earnings above that threshold.
3. What happens if I don't file FBAR or FATCA forms?
FBAR penalties range from $10,000 per violation (non-willful) to the greater of $100,000 or 50% of the account balance (willful). FATCA penalties start at $10,000 per missed form. The IRS offers streamlined filing procedures for unintentional failures.
