Do You Have to Pay American Taxes If You Live in Another Country?

The Foundation of US Taxation for Citizens Abroad

The United States employs a unique system of citizenship-based taxation, meaning its citizens and resident aliens are subject to tax on their worldwide income, regardless of where they live. This principle stands in contrast to most other countries, which typically tax individuals based on their residency. For tax purposes, a “US citizen” includes individuals born in the United States, naturalized citizens, and often, Green Card holders.

US tax law means that income earned anywhere in the world, whether from wages, self-employment, investments, or rental properties, is generally considered taxable by the IRS. Consequently, US citizens living abroad are usually required to file an annual income tax return, Form 1040, even if their income falls below the threshold for owing US tax after considering various exclusions or credits.

Strategies for Reducing or Eliminating US Tax Liability

US citizens residing overseas have specific provisions available to them to help alleviate the burden of potential double taxation, where income might be taxed by both the foreign country of residence and the United States. These mechanisms aim to reduce or, in some cases, eliminate US tax liability on foreign-earned income.

One primary strategy is the Foreign Earned Income Exclusion (FEIE), which allows qualifying individuals to exclude a certain amount of their foreign-earned income from US taxation. For the 2024 tax year, the maximum exclusion is $126,500, increasing to $130,000 for the 2025 tax year. To qualify for the FEIE, an individual must have a tax home in a foreign country and meet either the Physical Presence Test or the Bona Fide Residence Test. Foreign earned income generally includes wages, salaries, and self-employment income received for services performed in a foreign country, but it does not apply to passive income such as dividends or rental income. Claiming the FEIE requires filing Form 2555, Foreign Earned Income, with the annual tax return.

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 consecutive 12-month period. Alternatively, the Bona Fide Residence Test focuses on the quality and permanence of an individual’s ties to a foreign country.

To meet this test, one must be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. This involves establishing a true residence with an intention to reside there indefinitely.

Beyond the FEIE, the Foreign Tax Credit (FTC) offers another way to avoid double taxation by allowing taxpayers to credit foreign income taxes paid against their US tax liability on foreign-source income. This credit is claimed using Form 1116, Foreign Tax Credit. The FTC is typically beneficial when foreign tax rates are higher than US rates, as it can reduce the US tax owed dollar-for-dollar. It is generally not advisable to use both the FEIE and FTC on the same income.

In addition to the FEIE, individuals may also be able to claim a Foreign Housing Exclusion or Deduction. This provision allows for the exclusion or deduction of certain reasonable housing expenses incurred abroad, such as rent and utilities. This exclusion or deduction is tied to the maximum FEIE amount, with a base housing amount that must be exceeded.

Mandatory Reporting of Foreign Financial Accounts and Assets

Beyond income tax obligations, US persons residing abroad must also adhere to specific reporting requirements concerning their foreign financial accounts and assets. These requirements are distinct from income tax filings and are designed to enhance transparency and combat financial crimes. Failing to comply can result in significant penalties.

One such requirement is the Report of Foreign Bank and Financial Accounts, commonly known as FBAR. This report is filed electronically with the Financial Crimes Enforcement Network (FinCEN) using FinCEN Form 114. A US person, including a citizen or resident, must file an FBAR if they have a financial interest in, or signature authority over, one or more financial accounts located outside the United States, and the aggregate value of these accounts exceeded $10,000 at any time during the calendar year. This threshold applies to the total value across all foreign accounts, not each individual account.

Types of accounts that must be reported include:
Bank accounts
Securities accounts
Mutual funds
Certain insurance policies with cash value

Another important reporting obligation stems from the Foreign Account Tax Compliance Act (FATCA), which requires certain US taxpayers to report specified foreign financial assets on Form 8938, Statement of Specified Foreign Financial Assets. This form is filed with the IRS as part of the annual income tax return. The filing thresholds for Form 8938 vary depending on residency and filing status. For unmarried individuals living abroad, the threshold is generally $200,000 at year-end or $300,000 at any time during the year. For married individuals filing jointly and living abroad, these thresholds double to $400,000 at year-end or $600,000 at any time.

While both involve foreign financial holdings, they are separate requirements with different reporting thresholds and cover different types of assets. FBAR focuses solely on foreign financial accounts, while Form 8938 under FATCA encompasses a broader range of specified foreign financial assets, which can include not only financial accounts but also other foreign financial instruments and interests. Meeting the requirements for one does not automatically satisfy the other, and both may need to be filed simultaneously depending on an individual’s financial situation.

Understanding Your Filing Obligations and Deadlines

Navigating the procedural aspects of filing, including deadlines and methods, is crucial for US citizens abroad. Adhering to these timelines helps ensure compliance and avoids potential penalties.

For US citizens and resident aliens residing abroad, the standard income tax return (Form 1040) due date is automatically extended. While the general deadline for filing and paying taxes is April 15, those living overseas receive an automatic two-month extension, pushing the filing deadline to June 15. Even with this extension, any taxes owed are still technically due by April 15, and interest may accrue on unpaid balances after this date. If more time is needed, an additional extension to October 15 can be requested by filing Form 4868 before the June 15 deadline.

The FBAR (FinCEN Form 114) also has an initial April 15 due date, but it receives an automatic extension to October 15. This extension is granted automatically, meaning no specific form or request is necessary to obtain it. It is important to remember that the FBAR is filed electronically with FinCEN, not with the IRS, and is separate from the income tax return.

Form 8938, Statement of Specified Foreign Financial Assets, is filed with the annual income tax return. Therefore, its due date aligns with the income tax return deadline, which for US citizens abroad is June 15, or October 15 if an extension is filed. Taxpayers can choose to file their returns electronically through various tax software options or with the assistance of a tax professional.

For individuals who anticipate owing US tax, estimated tax payments may be required throughout the year. This applies to income not subject to withholding, such as self-employment income or significant investment gains. These payments are typically made in quarterly installments, generally due in April, June, September, and January of the following year, though exact dates can vary slightly. Paying estimated taxes helps avoid underpayment penalties that can arise if a substantial tax liability is not covered through withholding or timely payments.