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U.S. Tax Filing for Americans Abroad

Expat Tax Returns

The United States is one of only two countries in the world that taxes its citizens on worldwide income, no matter where they live. If you’re a U.S. citizen or green card holder working in London, Tokyo, Dubai, or anywhere else overseas, you’re still required to file a U.S. tax return every year. That’s what expat tax is — the ongoing obligation to report your global income to the IRS, even when you’re paying taxes to another country on the same earnings.

What Is Expat Tax, Exactly?

Expat tax refers to the U.S. tax obligations that follow American citizens and permanent residents abroad. Unlike most countries, which only tax residents on domestic income, the U.S. taxes based on citizenship. You could live in Berlin for twenty years, earn your entire salary there, and still owe the IRS a filing.

The good news: you probably won’t owe much (or anything) in actual U.S. tax. The tax code includes provisions specifically designed to prevent double taxation — the Foreign Earned Income Exclusion, the Foreign Tax Credit, and various treaty benefits. But you have to file to claim them. Skipping the return because you “don’t owe anything” is one of the most common and most costly mistakes expats make.

What is expat tax in practical terms? It’s an annual Form 1040 reporting your worldwide income, plus a handful of additional forms depending on your situation — foreign bank accounts, foreign corporations, foreign trusts, and foreign retirement plans each have their own reporting requirements with penalties that can run into the tens of thousands.

The Foreign Earned Income Exclusion (FEIE)

The Foreign Earned Income Exclusion lets qualifying expats exclude up to $126,500 (2024 amount, adjusted annually for inflation) of foreign earned income from U.S. tax. You claim it on Form 2555.

To qualify, you need to meet one of two tests:

The Physical Presence Test

You must be physically present in a foreign country for at least 330 full days during any 12-month period. “Full days” means the entire 24 hours — days of departure and arrival in the U.S. don’t count. This test is straightforward to prove with travel records, but it requires careful day-counting. A two-week trip home for the holidays could put you under the 330-day threshold if you’re not tracking carefully.

The Bona Fide Residence Test

You must be a bona fide resident of a foreign country for an uninterrupted period that includes a full tax year. This is harder to prove but more flexible — temporary trips back to the U.S. won’t disqualify you the way they might under the physical presence test. The IRS looks at factors like the nature of your stay, your ties to the foreign country, and whether you intend to return permanently to the U.S.

The FEIE only applies to earned income — salary, wages, self-employment income, and professional fees. It does not cover investment income, rental income, capital gains, pensions, or Social Security. Those stay fully taxable regardless of where you live.

Foreign Tax Credit vs. FEIE: Which One to Use

The Foreign Tax Credit (Form 1116) works differently from the exclusion. Instead of excluding income, it gives you a dollar-for-dollar credit against your U.S. tax for taxes you’ve already paid to a foreign government.

For expats in high-tax countries — the UK, Germany, France, Japan, Australia — the foreign tax credit often works out better than the FEIE. If you’re paying 40% to Her Majesty’s Revenue and Customs on income that would only be taxed at 24% in the U.S., the credit eliminates your U.S. tax entirely and you may have excess credits to carry forward.

In low-tax or no-tax jurisdictions — Dubai, the Bahamas, Singapore (for certain income types) — the FEIE is usually the better choice because there’s little or no foreign tax to credit against your U.S. liability.

You can use both provisions on the same return, but not on the same income. The income you exclude under the FEIE can’t also generate foreign tax credits. Getting the split right is one of the places where expat tax preparation gets technical, and getting it wrong in one direction or the other can cost you thousands.

We cover the foreign tax credit mechanics in detail on our Form 1116 guide.

FBAR and FATCA: Reporting Requirements That Catch People

Filing your tax return is only half of the expat tax picture. The other half is information reporting — and this is where the penalties get serious.

FBAR (FinCEN Form 114)

If the combined value of your foreign financial accounts exceeds $10,000 at any point during the year, you must file an FBAR. This includes bank accounts, brokerage accounts, mutual funds, and certain retirement accounts. The FBAR is filed separately from your tax return through the BSA E-Filing system, with a deadline of April 15 (automatic extension to October 15).

The penalty for a willful FBAR violation is the greater of $100,000 or 50% of the account balance — per account, per year. Non-willful violations carry a $10,000 penalty per account. These numbers are not theoretical. The IRS enforces them.

FATCA (Form 8938)

The Foreign Account Tax Compliance Act requires expats to report specified foreign financial assets on Form 8938 if their total value exceeds certain thresholds. For expats living abroad, the threshold is $200,000 at year-end or $300,000 at any point during the year (single filers; double for married filing jointly). This form is filed with your tax return, unlike the FBAR.

FBAR and FATCA overlap in coverage but have different thresholds, different filing methods, and different penalty structures. Most expats with foreign accounts need to file both.

Expats Who Haven’t Filed in Years

If you’ve been living abroad and haven’t filed U.S. returns, you’re not alone. The IRS estimates that millions of Americans abroad are non-compliant. The question is how to get current without triggering penalties.

The Streamlined Filing Compliance Procedures are the IRS’s program specifically for this situation. If you can certify that your failure to file was non-willful (you didn’t know about the requirement, or you genuinely misunderstood your obligations), you can file three years of back returns and six years of FBARs with no penalties.

This is a real program that works. We’ve used it for dozens of expat clients who went years without filing. The key is the non-willful certification — you have to credibly explain why you didn’t file, and the explanation needs to hold up if the IRS ever reviews it.

Don’t wait for the IRS to contact you. The Streamlined procedures are only available before the IRS initiates an examination. Once they come to you, the program is off the table and the penalties stack up fast. Getting ahead of the problem is the single best thing a non-compliant expat can do.

Self-Employment Tax for Expats

Self-employed expats face an extra layer of complexity. The FEIE excludes income from income tax, but it does not exclude self-employment income from self-employment tax. That 15.3% charge for Social Security and Medicare applies whether you live in Manhattan or Manila.

There’s an exception if you live in a country that has a totalization agreement with the U.S. (about 30 countries, including the UK, Canada, Germany, and Australia). If you’re covered under the foreign country’s social security system and have a certificate of coverage, you may be exempt from U.S. self-employment tax. Without that agreement, you owe both systems.

For freelancers and consultants abroad, this is often the biggest surprise in expat tax. They assume that excluding their income under the FEIE means they owe nothing. Then they discover a $15,000 self-employment tax bill that the exclusion doesn’t touch.

State Tax Obligations for Expats

Federal taxes are just the starting point. Some states continue to tax former residents who move abroad, depending on domicile rules. California and New York are the most aggressive — both states will argue that you’re still a resident if you maintain ties like a driver’s license, voter registration, or a home you haven’t sold.

States with no income tax (Florida, Texas, Nevada, Washington) create a simpler exit. If your last U.S. state of residence was one of these, you don’t have state-level expat tax concerns.

For everyone else, breaking state tax residency before moving abroad is a real planning consideration. It’s much easier to do it at the time of departure than to argue about it with the state after the fact.

How We Help Expats at The Reed Corporation

We work with American expats in over 40 countries. The work typically includes:

Preparing federal and state returns with FEIE, foreign tax credits, or both — whichever saves more
Filing FBARs and FATCA forms (Form 8938) for foreign account reporting
Handling Streamlined Filing for expats who need to get current on back returns
Coordinating with foreign tax advisors when treaty provisions or totalization agreements apply
Reporting foreign corporations, partnerships, trusts, and retirement plans (Forms 5471, 8865, 3520, and related filings)

Most of our expat clients work with us remotely. The process runs entirely over email and our secure portal — time zones don’t matter. If you’re trying to figure out what is expat tax in your specific situation, or you’ve missed a few years and want to catch up, that’s a conversation we have regularly.

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Frequently Asked Questions

What is expat tax and who has to pay it?

Expat tax is the U.S. tax obligation that applies to American citizens and green card holders living and working outside the United States. The U.S. taxes based on citizenship, not residence — so even if you’ve lived in another country for decades, you’re still required to file a U.S. federal tax return reporting your worldwide income every year. This includes salary, self-employment income, investment income, rental income, and capital gains earned anywhere in the world. What is expat tax in practice? It’s your annual Form 1040, potentially combined with Form 2555 (Foreign Earned Income Exclusion), Form 1116 (Foreign Tax Credit), FBAR (FinCEN Form 114 for foreign bank accounts), and Form 8938 (FATCA reporting). The good news is that provisions like the FEIE — which lets you exclude up to $126,500 of foreign earned income in 2024 — and the Foreign Tax Credit mean most expats owe little or no actual U.S. tax. But you have to file to claim those benefits. The obligation to file exists regardless of whether you owe tax, and the penalties for not filing (especially FBAR penalties, which can reach $100,000 per account for willful violations) make compliance non-negotiable.

Do I still have to file U.S. taxes if I pay taxes in another country?

Yes. Paying taxes to a foreign government does not eliminate your U.S. filing requirement. What is expat tax if not exactly this situation — the requirement to report to the IRS even when you’ve already paid taxes elsewhere. The U.S. provides two primary mechanisms to prevent double taxation. The Foreign Tax Credit (Form 1116) gives you a dollar-for-dollar credit against your U.S. tax liability for income taxes paid to foreign governments. If you’re in a high-tax country like the UK, France, or Germany where rates exceed U.S. rates, the credit typically eliminates your U.S. tax entirely. The Foreign Earned Income Exclusion (Form 2555) lets you exclude up to $126,500 of foreign earned income from U.S. taxation altogether, which works better in low-tax or no-tax jurisdictions where there’s little foreign tax to credit. You can use both provisions on the same return, but not on the same income. The filing obligation itself never goes away — even if the net result is zero tax owed, you must still file the return. Failure to file can result in penalties, and more importantly, it forfeits your ability to claim the FEIE and Foreign Tax Credit retroactively.

What is the Foreign Earned Income Exclusion and how much can I exclude?

The Foreign Earned Income Exclusion (FEIE) allows qualifying U.S. expats to exclude up to $126,500 (2024 figure, adjusted annually for inflation) of foreign earned income from U.S. federal income tax. You claim it on Form 2555, and you must meet either the Physical Presence Test (present in a foreign country for 330 full days in any 12-month period) or the Bona Fide Residence Test (a bona fide resident of a foreign country for a full tax year). The exclusion applies only to earned income — wages, salary, self-employment earnings, and professional fees. It does not cover investment income, rental income, pensions, Social Security, or capital gains. Those remain taxable under normal U.S. rules regardless of what is expat tax treatment on earned income. One important wrinkle: the FEIE does not exempt you from self-employment tax. If you’re a freelancer earning $100,000 abroad, you can exclude that income from income tax, but you still owe approximately $14,130 in self-employment tax (Social Security and Medicare) unless a totalization agreement with the host country applies. Married couples who both qualify can each claim the full exclusion amount on their respective earned income.

What happens if I haven’t filed U.S. taxes while living abroad?

If you’ve been living overseas and haven’t filed U.S. returns, the IRS offers a program called the Streamlined Filing Compliance Procedures specifically for this situation. You file three years of delinquent income tax returns and six years of FBARs, certify that your failure to file was non-willful (you didn’t know or genuinely misunderstood the expat tax requirement), and the IRS waives all late filing penalties. This is a real, functioning program that we’ve used for dozens of clients. The certification of non-willfulness is the critical piece — the IRS reviews these statements, and your explanation needs to be credible and specific to your circumstances. Common qualifying reasons include not knowing the U.S. taxes citizens abroad, relying on incorrect advice from a foreign tax advisor, or genuinely believing that the Foreign Earned Income Exclusion meant you didn’t need to file. What is expat tax compliance worth getting right? Consider the alternative: without the Streamlined program, late filing penalties accumulate at 5% of unpaid tax per month (up to 25%), and FBAR penalties can reach $100,000 or 50% of account balances per willful violation. The program is only available before the IRS contacts you, so acting before they find you is critical.

Do expats have to report foreign bank accounts to the IRS?

Yes, and this reporting requirement has some of the steepest penalties in the entire tax code. If the combined value of all your foreign financial accounts exceeds $10,000 at any point during the calendar year, you must file an FBAR (FinCEN Form 114). This covers checking accounts, savings accounts, brokerage accounts, mutual funds, and in many cases, foreign pension and retirement accounts. The FBAR is filed separately from your tax return through the BSA E-Filing system, with a deadline of April 15 and an automatic extension to October 15. Separately, FATCA (the Foreign Account Tax Compliance Act) requires expats to report specified foreign financial assets on Form 8938 if total values exceed $200,000 at year-end or $300,000 at any point during the year for single expat filers. This form is filed with your tax return. The two requirements overlap — most expats who file one need to file both. Understanding what is expat tax reporting helps explain the severity of the penalties: willful FBAR violations carry a penalty of $100,000 or 50% of the account balance (whichever is greater), per account, per year. Non-willful violations are $10,000 per account. The IRS treats these seriously because the FBAR was originally designed to catch money laundering and offshore tax evasion.