Do I Pay US Taxes If I Live Abroad?

The United States taxes its citizens and lawful permanent residents on their worldwide earnings, regardless of where they reside or where their income originates. US citizens and green card holders living outside the United States typically must file annual tax returns.

This article clarifies common US tax responsibilities for individuals living abroad. It outlines who is a US taxpayer, discusses tax relief provisions to prevent double taxation, details foreign asset reporting requirements, and explains how to file a US tax return from a foreign country.

US Taxpayer Status Abroad

Understanding who qualifies as a US taxpayer is the first step in navigating tax obligations while living outside the United States. The US tax system operates on citizenship-based taxation, meaning US citizens are subject to US income tax on their global income, regardless of physical location or income source.

This worldwide taxation also applies to US lawful permanent residents (green card holders). They are taxed on their worldwide income, similar to US citizens. Living abroad or earning income solely from foreign sources does not exempt them from US tax responsibilities.

Individuals with US citizenship but without strong ties to the United States are sometimes called “accidental Americans.” These include those born in the US who left as children or born abroad to a US citizen parent. They are still considered US citizens for tax purposes and are subject to the same US tax obligations, including filing annual tax returns and reporting worldwide income, even if they have never lived in the US or earned US income.

Key Tax Relief Provisions

US tax law offers specific provisions to help individuals living abroad mitigate double taxation, which occurs when the same income is taxed by both the United States and a foreign country. Two primary mechanisms for tax relief are the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). These options allow qualifying individuals to reduce their US tax liability.

Foreign Earned Income Exclusion (FEIE)

The Foreign Earned Income Exclusion allows eligible individuals to exclude a certain amount of their foreign earned income from US taxation. For 2024, the maximum exclusion is $126,500 per qualifying individual. This exclusion applies to “foreign earned income,” such as wages, salaries, professional fees, and other amounts received for personal services performed in a foreign country.

To qualify for the FEIE, an individual must meet one of two tests: the Bona Fide Residence Test or the Physical Presence Test. The Bona Fide Residence Test requires an individual to establish a tax home and be a bona fide resident in a foreign country for an uninterrupted period that includes an entire tax year. This test considers factors like visa status, living arrangements, and local tax filings.

The Physical Presence Test requires an individual to be physically present in a foreign country or countries for at least 330 full days during any 12-month period. These 330 days do not need to be consecutive. A “full day” is a 24-hour period, and exceeding 35 days in the US generally disqualifies an individual under this test.

Income not qualifying for the FEIE includes passive income like interest, dividends, rental income, and capital gains. Pension or annuity payments, including Social Security benefits, are also not considered foreign earned income for this exclusion. The exclusion amount is prorated if the qualifying period covers only part of the tax year. Individuals claim the FEIE by filing Form 2555, Foreign Earned Income.

Foreign Tax Credit (FTC)

The Foreign Tax Credit (FTC) allows individuals to claim a credit for income taxes paid or accrued to a foreign country, reducing their US tax liability dollar-for-dollar. This credit is generally more advantageous than a deduction because it directly offsets US tax owed, preventing double taxation on the same income.

To qualify, foreign taxes must be legally imposed and paid to a foreign government on foreign-source income. Generally, only income, war profits, and excess profits taxes qualify. Sales tax or value-added tax typically do not qualify unless levied in lieu of an income tax.

The amount of FTC claimed in any year is limited, preventing it from offsetting US tax on US-source income. The credit cannot exceed the US tax attributable to foreign-source income. If qualifying foreign taxes paid exceed this limit, the unused credit may be carried back one year and then carried forward for up to 10 years. Individuals claim the FTC by filing Form 1116.

Relationship between FEIE and FTC

Choosing between the Foreign Earned Income Exclusion and the Foreign Tax Credit requires careful consideration, as income excluded via the FEIE generally cannot also be used to claim an FTC. The FEIE is typically beneficial for individuals whose foreign earned income is less than or near the exclusion amount and who pay little or no foreign income tax. Conversely, the FTC is often more advantageous for those with foreign income significantly above the exclusion amount or who pay high foreign income taxes. The decision depends on individual circumstances, including income levels, foreign tax rates, and income types.

Reporting Foreign Assets and Accounts

Beyond income taxation, US persons living abroad have specific reporting requirements for foreign financial assets and accounts, even if no tax is due. These requirements enhance transparency and combat financial crimes and tax evasion. Two primary obligations are the Report of Foreign Bank and Financial Accounts (FBAR) and reporting under the Foreign Account Tax Compliance Act (FATCA).

Report of Foreign Bank and Financial Accounts (FBAR – FinCEN Form 114)

The Report of Foreign Bank and Financial Accounts, known as FBAR, is a requirement for US persons with financial interests in or signature authority over foreign financial accounts. A “US person” includes citizens, residents, corporations, partnerships, trusts, and estates.

Individuals must file an FBAR if the aggregate value of all their foreign financial accounts exceeded $10,000 at any point during the calendar year. This threshold applies to the combined value of all accounts. Foreign financial accounts include bank accounts, brokerage accounts, mutual funds, and some foreign pension plans.

The FBAR is filed electronically with the Financial Crimes Enforcement Network (FinCEN), not the IRS. Failure to file an FBAR when required can result in significant penalties, from civil monetary penalties to criminal charges for willful non-compliance. The filing deadline for FBAR is April 15th, with an automatic extension to October 15th.

Foreign Account Tax Compliance Act (FATCA – Form 8938, Statement of Specified Foreign Financial Assets)

The Foreign Account Tax Compliance Act (FATCA) is another reporting requirement. FATCA requires foreign financial institutions to report information about accounts held by US persons to the IRS. Certain US persons must also report their specified foreign financial assets directly to the IRS.

Individuals must file Form 8938, Statement of Specified Foreign Financial Assets, if their specified foreign financial assets exceed certain thresholds. “Specified foreign financial assets” include foreign financial accounts, foreign stock or securities not held in a financial account, and interests in foreign entities like partnerships. Some foreign pension plans may also be reportable.

Form 8938 filing thresholds vary by taxpayer’s filing status and residency. For US persons living abroad, thresholds are higher. For single filers or those married filing separately, the 2024 threshold is $200,000 on the last day of the tax year or $300,000 at any time during the year. For those married filing jointly and living abroad, thresholds are $400,000 on the last day of the tax year or $600,000 at any time during the year. Form 8938 is filed with the IRS as part of the annual income tax return.

Distinction and Overlap between FBAR and FATCA

While both FBAR and FATCA require reporting foreign assets, they serve different purposes and have distinct requirements. FBAR is filed with FinCEN and focuses on foreign financial accounts, with a $10,000 reporting threshold. FATCA, reported on Form 8938 to the IRS, covers a broader range of specified foreign financial assets and has higher reporting thresholds.

Many individuals must file both an FBAR and Form 8938, as asset types and reporting thresholds differ. For example, a foreign bank account might be reportable on both forms if its value, combined with other accounts, exceeds both the FBAR and FATCA thresholds.

Filing Your US Tax Return from Abroad

Once necessary information is gathered and tax relief provisions and reporting requirements are understood, the final step is to prepare and submit the US tax return. This involves specific forms, deadlines, and submission methods.

Gathering all relevant financial documents is a key step, including income statements, foreign tax documents, and statements for foreign financial accounts and assets subject to FBAR or FATCA reporting.

The primary income tax return for individuals is Form 1040. US citizens and residents abroad often need to include several other common forms:
Schedule B, Interest and Ordinary Dividends, for certain foreign interest or dividend income.
Form 2555, Foreign Earned Income, to claim the Foreign Earned Income Exclusion.
Form 1116, Foreign Tax Credit, if claiming the Foreign Tax Credit.
Form 8938, Statement of Specified Foreign Financial Assets, for reporting specified foreign financial assets under FATCA.

US citizens and residents living abroad receive an automatic two-month extension to file their tax returns, moving the April 15th deadline to June 15th. If more time is needed, taxpayers can request an extension to October 15th by filing Form 4868. While these extensions provide more time to file, any taxes owed are generally still due by the original April 15th deadline to avoid interest and penalties.

Tax returns can be filed electronically using IRS-approved software or through a tax professional. Alternatively, taxpayers can paper file by mailing returns to the appropriate IRS address for international filers. If no payment is enclosed, returns are typically mailed to: Department of the Treasury, Internal Revenue Service, Austin, TX 73301-0215, USA. If a payment is enclosed, the address is often: Internal Revenue Service, P.O. Box 1303, Charlotte, NC 28201-1303, USA.

After filing, e-filers typically receive an electronic confirmation within a few days. Paper-filed returns may take longer to process. Taxpayers should keep copies of all submitted documents.