Do I Have to Pay Taxes If I Live Outside the US?

The United States tax system operates on a unique principle known as citizenship-based taxation. This means that if you are a U.S. citizen or a Green Card holder, your worldwide income is generally subject to U.S. taxation, regardless of where you live or where your income is earned. This differs significantly from most other countries that employ a residency-based taxation system, where individuals are taxed primarily on income earned within the country or while residing there. This article explains the core aspects of these tax obligations for individuals residing outside the U.S.

US Taxpayer Status for Individuals Abroad

The U.S. tax system defines a “U.S. taxpayer” broadly, extending tax obligations to individuals even when they reside outside the country. This primarily includes U.S. citizens and lawful permanent residents, commonly known as Green Card holders. Both groups are generally subject to U.S. tax on their worldwide income, meaning income from any source is potentially taxable by the U.S. government.

For U.S. citizens, this obligation applies irrespective of their physical location. Non-citizens and non-Green Card holders can also become U.S. tax residents if they meet the Substantial Presence Test, which considers the number of days spent in the U.S. over a three-year period.

Income Subject to US Taxation

Individuals considered U.S. taxpayers, regardless of their residence, are generally subject to U.S. taxation on all types of income earned globally. This “worldwide income” encompasses a broad range of earnings, whether sourced from within the U.S. or from a foreign country.

Earned income, such as wages, salaries, professional fees, and self-employment income, falls under this global taxation rule. Beyond earned income, various forms of unearned or passive income are also included. This covers interest from bank accounts, dividends from investments, capital gains realized from the sale of assets like stocks or real estate, rental income from properties, royalties, and distributions from pensions and annuities.

These income streams form the basis for calculating U.S. tax liability. For example, an individual living abroad who receives a salary from a foreign employer and also earns dividends from foreign investments must include both in their total income for U.S. tax purposes.

Key Tax Provisions for Expats

To alleviate potential double taxation where income is taxed by both the U.S. and a foreign country, several specific tax provisions are available for U.S. citizens and resident aliens living abroad. These mechanisms help reduce or, in some cases, eliminate U.S. tax liability on foreign-sourced income.

The Foreign Earned Income Exclusion (FEIE) allows qualifying individuals to exclude a certain amount of their foreign earned income from U.S. taxation. For the 2024 tax year, the maximum exclusion is $126,500, increasing to $130,000 for 2025. To qualify for the FEIE, an individual must meet either the Bona Fide Residence Test, which requires being a resident of a foreign country for an uninterrupted period including an entire tax year, or the Physical Presence Test, requiring presence in a foreign country for at least 330 full days during any 12 consecutive months. This exclusion applies only to earned income, not to passive income like interest, dividends, or capital gains, and requires filing Form 2555, Foreign Earned Income, to elect its use.

In conjunction with the FEIE, the Foreign Housing Exclusion or Deduction allows individuals to exclude or deduct certain reasonable housing expenses paid abroad. This provision covers costs such as rent, utilities, and property insurance, but generally excludes expenses like mortgage payments or the purchase of furniture. The amount excludable or deductible is typically limited to 30% of the maximum FEIE, which for 2024 is $37,950, though this limit can be higher in certain high-cost localities. To utilize this benefit, housing expenses must exceed a base housing amount, which for 2024 is 16% of the FEIE, or $20,240, and is also claimed on Form 2555.

Alternatively, or in combination with the FEIE for certain income types, the Foreign Tax Credit (FTC) provides a dollar-for-dollar reduction of U.S. tax liability for income taxes paid or accrued to a foreign country. This credit is generally available for income, war profits, and excess profits taxes imposed by a foreign country or U.S. possession. The FTC can be particularly beneficial when foreign tax rates are similar to or higher than U.S. rates, effectively reducing U.S. tax on the same income to zero. Claiming the FTC typically requires filing Form 1116, Foreign Tax Credit, with the tax return. While both the FEIE and FTC aim to prevent double taxation, an individual generally chooses between them for foreign earned income, but the FTC can also apply to foreign-source passive income.

Filing Obligations and Deadlines

Even when residing outside the U.S., U.S. citizens and Green Card holders generally must file a U.S. income tax return (Form 1040) if their worldwide gross income exceeds the annual filing threshold. For the 2024 tax year, for instance, the filing threshold for a single individual under age 65 is $14,600, while for married individuals filing jointly, it is $29,200. This filing requirement applies even if an individual expects to owe no U.S. tax due to various exclusions or credits.

Taxpayers living outside the U.S. receive an automatic two-month extension to file their returns, pushing the typical April 15 deadline to June 15. If additional time is needed, an extension to October 15 can be requested by filing Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, before the June 15 deadline. While these extensions grant more time to file the return, the payment deadline for any taxes owed remains April 15. Interest and potential penalties can accrue on any unpaid tax balance after this date.

Beyond Form 1040, individuals abroad may need to submit additional forms, such as Form 2555 for claiming the Foreign Earned Income Exclusion and Foreign Housing Exclusion/Deduction, or Form 1116 for claiming the Foreign Tax Credit. These forms are integral to properly calculating U.S. tax liability and utilizing available benefits. All necessary forms must be filed accurately and on time.

Reporting Foreign Financial Accounts and Assets

Beyond income tax returns, U.S. persons with foreign financial accounts and assets have additional reporting obligations. These requirements are distinct from income tax filing and are designed to enhance transparency regarding overseas holdings. Non-compliance can lead to significant penalties.

One primary requirement is the Report of Foreign Bank and Financial Accounts (FBAR), filed electronically with the Financial Crimes Enforcement Network (FinCEN) on Form 114. A U.S. person must file an FBAR if they have a financial interest in, or signature authority over, one or more foreign financial accounts, and the aggregate value of these accounts exceeded $10,000 at any point during the calendar year. This includes, but is not limited to, bank accounts, brokerage accounts, and foreign mutual funds. The FBAR deadline is April 15, with an automatic extension granted to October 15.

Separately, the Foreign Account Tax Compliance Act (FATCA) mandates reporting of specified foreign financial assets on Form 8938, Statement of Specified Foreign Financial Assets, which is filed with the individual’s income tax return. The thresholds for filing Form 8938 are generally higher than for FBAR, varying based on filing status and residence. For single individuals living abroad, the threshold is typically an aggregate value exceeding $200,000 at year-end or $300,000 at any time during the year; for married individuals filing jointly, these thresholds are $400,000 at year-end or $600,000 at any time. Form 8938 covers a broader range of assets than FBAR, including certain non-account assets like foreign stock or partnership interests not held in a financial account. FBAR and FATCA reporting are separate requirements with different forms, thresholds, and filing methods.