Tax Relief for Americans Living Abroad: How to Avoid Double Taxation on Foreign Income
Tax Relief for Americans Living Abroad: How to Avoid Double Taxation on Foreign Income
Learn about your relief provisions as an American abroad before paying income tax to two countries on the same earnings.
Written by
Orville Marshall
Orville Marshall is a tax expert at BestMoney.com. An Enrolled Agent with over 10 years of experience, he specializes in tax preparation and consulting for individuals and businesses. Orville holds an MBA in Business Administration from Nova Southeastern University and a degree in Accounting & Management Studies from The University of the West Indies, bringing extensive expertise in tax management and technology-driven solutions to his work.
Tax relief for Americans living abroad helps you avoid double taxation on foreign income. You need it because the U.S. taxes citizens and green card holders onworldwide income wherever they live, per the IRS.
The Foreign Earned Income Exclusion, Foreign Tax Credit and tax treaty benefits can eliminate or substantially reduce double taxation. If you want hands-on help, start bycomparing tax relief companies.
Two 2026 updates matter. The FEIE limit rises to $132,900 for 2026, per theIRS's 2026 inflation adjustments. And on Aug. 31, 2026, a federal appeals court ruled inEstate of Bruyea v. United States that treaty-based foreign tax credits can't offset the 3.8% Net Investment Income Tax.
Key Insights
FEIE limit: $130,000 for 2025 returns and $132,900 for 2026, per qualifying person.
The Foreign Tax Credit cuts U.S. tax for foreign income tax you paid. It often suits people in high-tax countries.
A 2026 appeals ruling bars using foreign tax credits against the 3.8% Net Investment Income Tax.
File an FBAR if your foreign accounts top $10,000 combined at any point in the year.
The physical presence test requires 330 full days abroad in any 12-month period.
How Does Tax Relief for Americans Living Abroad Help You Avoid Double Taxation on Foreign Income?
It works through three main IRS options: the FEIE, the FTC and tax treaties. Totalization agreements add relief for Social Security taxes.
Think of the FEIE as a tax-free allowance for income you earn abroad. The FTC is more like a receipt you hand the IRS showing you already paid.
Relief option
What it does
Often a fit for
Form
Foreign Earned Income Exclusion (FEIE)
Excludes foreign earned income, up to a yearly limit
Low- or no-income-tax countries
Form 2555
Foreign Tax Credit (FTC)
Cuts U.S. tax by foreign income tax paid
High-tax countries and investment income
Form 1116
Tax treaty benefits
Sets which country taxes certain income
Income a specific treaty covers
Form 8833
Totalization agreement
Prevents paying Social Security tax twice
Workers in an agreement country
Certificate of coverage
Do Americans Living Abroad Still Have to File a U.S. Tax Return?
Yes. U.S. citizens and green card holders generally must file if their worldwide gross income meets theIRS filing requirement, even when living permanently overseas. That count includes income you later exclude with the FEIE.
For filers under 65, the standard deduction amounts below, from the IRS 2026 inflation release linked above, are a useful guide to those filing levels.
Filing status (under 65)
Tax year 2025
Tax year 2026
Single
$15,750
$16,100
Married filing jointly
$31,500
$32,200
Head of household
$23,625
$24,150
If you're self-employed, you generally must file once net self-employment earnings reach $400, per theIRS self-employment tax rules.
Will this change? Congress has seen residence-based taxation proposals, such asH.R. 10468, introduced Dec. 18, 2024. It wasn't enacted, so these rules still apply.
What Does Double Taxation Look Like for Americans Abroad?
Without relief provisions, Americans abroad pay income tax to both their country of residence and the United States on the same earnings.
Here's a hypothetical example. Say you earn a $120,000 foreign salary in 2025. If you qualify for the FEIE, you can exclude all of it under the $130,000 limit.
Without relief, that $120,000 would be taxable on your U.S. return on top of your foreign tax.
You Still Have to File
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.
How Does the Foreign Earned Income Exclusion (FEIE) Work?
TheForeign Earned Income Exclusion lets qualifying Americans exclude foreign earned income from U.S. tax, up to a yearly limit. You must file a U.S. return to claim it.
For 2025, the limit is $130,000, or $260,000 if both spouses qualify. It rises to $132,900 per person for 2026, according to theIRS's FEIE figures.
Who Qualifies for the Foreign Earned Income Exclusion?
You qualify if you have a foreign tax home and foreign earned income and pass one of two tests.
Tax home requirement: Your regular place of business or employment must be outside the U.S.
Physical presence test: Be in a foreign country or countries for 330 full days in any 12 consecutive months.
Bona fide residence test: Live in a foreign country for an uninterrupted period that includes an entire tax year.
Under theIRS physical presence test, the 330 days don't need to be consecutive. Time over international waters doesn't count.
For passive income, look to the FTC or a treaty instead.
How Do You Claim the FEIE and Foreign Housing Exclusion?
You claim both onForm 2555, filed with your annual return. The exclusion is prorated if you qualify for less than a full year.
The housing exclusion can cover part of your housing costs abroad. Per the IRS FEIE figures page, its limit is generally 30% of the FEIE: $39,000 for 2025 and $39,870 for 2026. The limit varies by location.
How Does the Foreign Tax Credit (FTC) Work?
TheForeign Tax Credit reduces your U.S. tax for foreign income taxes you paid, up to limits set by law.
In plain terms, an exclusion removes income from your taxable total. A credit cuts the tax bill itself, so each credit dollar generally means a dollar less tax, subject to those limits.
You can't claim an FTC on income you exclude with the FEIE, according to the IRS. You claim the credit on Form 1116. Under26 U.S.C. 904, the credit is capped at the U.S. tax on your foreign income, and excess credits can carry back one year or forward 10 years.
Can the Foreign Tax Credit Offset the Net Investment Income Tax?
Not under a treaty, the U.S. Court of Appeals for the Federal Circuit ruled on Aug. 31, 2026.
The Net Investment Income Tax (NIIT) is an extra 3.8% federal tax on certain investment income, such as dividends and capital gains. Bruyea, linked above, involved the U.S.-Canada treaty.Christensen v. United States involved the U.S.-France treaty.
Both reversed taxpayer wins in the Court of Federal Claims. If you have large gains or dividends abroad, you may owe NIIT despite paying foreign tax.
Should You Choose the FEIE or the Foreign Tax Credit?
It depends on your foreign tax rate, income level and type of income. BestMoney tax expert Orville Marshall, EA, weighs three factors: income level, foreign tax rate and income composition.
BestMoney summarized common scenarios based on the IRS rules above. These are general patterns, not cutoffs.
Your situation
Often fits
Why
Low- or no-income-tax country
FEIE
Little foreign tax to credit
High-tax country
FTC
Foreign tax may cover U.S. tax; excess credits carry forward
Earnings above the FEIE limit
FEIE plus FTC
Exclude up to the limit, credit the rest
Passive or investment income
FTC
FEIE covers earned income only
You can't claim both on the same dollar of income. But you can use FEIE on earned income and FTC on passive income.
How Do Tax Treaties and Totalization Agreements Prevent Double Taxation?
Tax treaties set which country can tax certain income and may lower tax. Many include a saving clause that lets the U.S. keep taxing its citizens, perIRS Publication 54.
Think of a treaty as a tie-breaker rule between two referees. Because of the saving clause, it often works alongside the FEIE and FTC. You generally disclose treaty-based positions onForm 8833.
The newest, with Romania, took effect Sept. 1, 2026. A certificate of coverage shows which country's Social Security system you pay into.
What Foreign Accounts and Assets Do You Need to Report?
Beyondincome tax returns, you may need to report foreign accounts on an FBAR and foreign assets on Form 8938.
When Do You Need to File an FBAR?
You need an FBAR if your foreign financial accounts total more than $10,000 at any time during the year. It's a yearly foreign-account report, filed separately from your tax return.
File FinCEN Form 114 electronically throughFinCEN. It's due April 15, with an automatic extension to Oct. 15, per the IRS comparison of FBAR and Form 8938 rules.
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
For penalties assessed on or after Jan. 17, 2025, theinflation-adjusted maximums are $16,536 non-willful and $165,353 willful. By statute, a willful penalty can instead reach50% of the account balance if greater.
InBittner v. United States (2023), the Supreme Court held the non-willful penalty applies per report, not per account.
When Do You Need to File Form 8938 Under FATCA?
If you live abroad, you file Form 8938 when your foreign financial assets top theIRS thresholds below. FATCA, the Foreign Account Tax Compliance Act, requires this form with your tax return.
$16,536 non-willful; willful $165,353 or 50% of balance (by statute)
$10,000, plus up to $50,000 more after IRS notice
FATCA penalty figures come from theIRS FATCA page. Willful FBAR violations can also bring criminal fines up to $250,000, up to five years in prison or both, under31 U.S.C. 5322.
How Does Double Taxation Relief Work in Common Expat Situations?
It depends on how you earn money and where you live.
How Are Remote Workers for U.S. Companies Taxed Abroad?
You can claim the FEIE if you meet the physical presence or bona fide residence test. The key factor is where you physically do the work, not where your employer is located.
You can exclude self-employment income with the FEIE, but it won't reduce your self-employment tax, according to the IRS FEIE page.
That 15.3%self-employment tax, a rate the IRS self-employment tax rules confirm, still applies unless a totalization agreement (see above) covers you.
Do Dual Citizens and "Accidental Americans" Have to File?
Yes. U.S. citizens, including dual citizens, are taxed on worldwide income wherever they live, per the IRS citizens-abroad guidance linked above.
That can include "accidental Americans," people who hold U.S. citizenship but have lived mostly abroad. If you qualify, the FEIE or FTC can cut U.S. tax.
How Are Retirees, Pensions and Social Security Taxed Abroad?
The FEIE doesn't cover pensions or Social Security, since they aren't earned income. The FTC or a treaty provision may reduce double tax instead.
How Do You Convert Foreign Income to U.S. Dollars?
Use any posted exchange rate consistently, since the IRS has no official rate. The IRS also publishesyearly average currency exchange rates, including 2025.
You file the last three years of returns and last six years of FBARs. In at least one of the last three years, you must have spent 330 full days outside the U.S. without a U.S. abode.
If you follow the rules, you avoid failure-to-file, failure-to-pay, accuracy, information-return and FBAR penalties.
Should You Hire a Tax Professional or File Yourself?
It depends on complexity. A professional may help if you have:
It's for U.S. citizens and green card holders with income or money abroad.
If you just moved abroad, start with the FEIE tests.
If you work remotely for a U.S. employer, check the remote worker section.
If you're a high earner in a high-tax country, compare the FTC with the FEIE.
If you're self-employed, check for a totalization agreement.
If you're retired, review how pensions and Social Security are taxed.
If you're behind on filing, read the Streamlined procedures section.
What's the Bottom Line on Avoiding Double Taxation Abroad?
Americans living abroad can avoid double taxation by using the Foreign Earned Income Exclusion, Foreign Tax Credit and tax treaties. These can help many expats eliminate or substantially reduce U.S. tax.
For 2026, plan around the $132,900 FEIE limit and the NIIT ruling. Track foreign taxes and days abroad, and file FBAR and Form 8938 reports when required.
Professional guidance can help, and our guide totax planning strategies can help you plan ahead.
Your Questions, Answered (FAQs)
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 report worldwide income. The FEIE and FTC can often reduce or eliminate the tax owed.
Can I use both the FEIE and the foreign tax credit?
Yes, but not on the same income. For example, you can exclude wages up to the limit and claim the FTC on income above it.
What happens if I don't file an FBAR or Form 8938?
Non-willful FBAR penalties can reach $16,536 per report, and Form 8938 penalties start at $10,000. The Streamlined procedures above may help non-willful filers.
What is the foreign earned income exclusion for 2026?
It's $132,900 per qualifying person for tax year 2026, up from $130,000 for 2025.
Do I still owe state taxes after moving abroad?
It depends on your former state's residency rules, which may still treat you as a resident. California, for example, publishesresidency guidelines explaining how it decides.
Why Trust BestMoney on This?
This guide comes from Orville Marshall, an Enrolled Agent and BestMoney tax expert with more than 10 years of experience in tax preparation and consulting for individuals and businesses.
He holds an MBA from Nova Southeastern University and studied Accounting & Management Studies at the University of the West Indies.
How We Researched This
BestMoney relied on government and court sources for this guide, not a proprietary survey.
Sources include the IRS, FinCEN, the eCFR, the U.S. Code, SSA, federal court opinions, Congress.gov, AARO and California's Franchise Tax Board.
Orville Marshall, EA, reviewed the strategies, eligibility rules and penalties. Results vary by income source, country and documentation.
BestMoney provides general tax guidance, not professional tax advice. Talk with a qualified tax professional about your situation.
Orville Marshall is a tax expert at BestMoney.com. An Enrolled Agent with over 10 years of experience, he specializes in tax preparation and consulting for individuals and businesses. Orville holds an MBA in Business Administration from Nova Southeastern University and a degree in Accounting & Management Studies from The University of the West Indies, bringing extensive expertise in tax management and technology-driven solutions to his work.
