Do You Have to Pay Taxes If You Don’t Live in the US?

The United States requires its citizens and lawful permanent residents to report their worldwide income, regardless of where they reside. This citizenship-based tax system means US tax obligations extend beyond geographical borders. Understanding these responsibilities is important for compliance, as specific rules and mechanisms exist to prevent double taxation while upholding worldwide income reporting.

US Citizens and Green Card Holders Abroad

US citizens and green card holders generally remain subject to US income tax on their worldwide income, irrespective of their physical location. This means income earned from any source, in any country, is potentially taxable by the United States, including wages, self-employment, and investment income.

The obligation to file a US federal income tax return persists even if an individual lives and works abroad, unless their gross income falls below the annual filing threshold. Even if no US tax is owed due to exclusions or credits, filing a return is necessary to claim these benefits and inform the IRS of financial activities.

Worldwide income encompasses all income from both US and foreign sources, such as income from a foreign employer, rental income from foreign property, or capital gains from foreign investments. Individuals must report all such income on their annual Form 1040.

Reducing Your US Tax Burden Abroad

US citizens and green card holders living abroad can reduce their US tax liability on foreign-earned income. The Foreign Earned Income Exclusion (FEIE) allows eligible individuals to exclude a specific amount of foreign earned income from US taxation. The exclusion limit is $126,500 for 2024 and $130,000 for 2025.

To qualify for the FEIE, an individual must have a tax home in a foreign country and satisfy either the Bona Fide Residence Test or the Physical Presence Test. The Bona Fide Residence Test requires residency in a foreign country for an uninterrupted period including an entire tax year. The Physical Presence Test requires physical presence in a foreign country for at least 330 full days during any 12-month period.

The Foreign Housing Exclusion or Deduction provides relief for qualifying housing expenses incurred abroad. This allows individuals to exclude or deduct a portion of foreign housing costs, such as rent, utilities, and property insurance. The exclusion or deduction amount is tied to the FEIE, with a base housing amount at 16% of the FEIE and a maximum exclusion generally limited to 30% of the FEIE.

For 2024, the base housing amount is $20,240, and the maximum exclusion is $37,950. For 2025, with the FEIE at $130,000, the base housing amount is $20,800, and the maximum exclusion is $39,000. To claim both the FEIE and the Foreign Housing Exclusion/Deduction, individuals must file Form 2555 with their tax return.

The Foreign Tax Credit (FTC) prevents double taxation when income is taxed by both the US and a foreign country. This credit allows taxpayers to reduce their US tax liability dollar-for-dollar by the amount of income taxes paid to a foreign government. The FTC is beneficial for foreign-sourced income not excluded by the FEIE, such as investment income, or for earned income exceeding the FEIE limit.

The FTC applies to income taxes imposed by a foreign country or US possession, provided the tax is a legal foreign tax liability. It is limited to the amount of US tax attributable to foreign-source income, preventing the credit from offsetting US tax on US-sourced income. Taxpayers use Form 1116 to calculate and claim this credit. The FEIE and FTC cannot be claimed on the same income; careful consideration is required to determine the most beneficial method.

State Tax Obligations for Expats

Even for individuals living abroad, state tax obligations can persist depending on their “domicile.” Domicile refers to an individual’s permanent home, the state where they maintain their closest personal and financial ties, and to which they intend to return. An individual can only have one domicile at a time.

States consider various factors to determine if an individual has relinquished domicile for tax purposes, demonstrating intent to abandon an old domicile and establish a new one. Indicators include changing voter registration, obtaining a new driver’s license, updating vehicle registration, and establishing a permanent home through purchase or long-term lease.

Financial ties, such as opening new bank accounts, transferring investment accounts, and updating mailing addresses, provide further evidence. Severing connections with the former state, like terminating club memberships, selling property, or ending a lease, also supports a claim of changed domicile. Family ties and the location of personal belongings are considered.

Simply moving out of a state does not automatically terminate domicile for tax purposes. Some states have statutory residency rules, considering an individual a resident if they maintain a permanent abode and spend a certain number of days there, often 183 or more. If deemed a domiciliary of one state and a statutory resident of another, individuals could face double taxation. Proactive steps are needed to demonstrate intent to change domicile and avoid potential state tax liabilities.

US Tax Obligations for Non-Residents

Individuals who are neither US citizens nor green card holders but earn US-sourced income may still have a US tax obligation. Nonresident aliens are generally taxed only on US-sourced income, determined by where the income-generating activity occurred or the nature of the payer.

Compensation for personal services is US-sourced if performed within the United States. Rental income from US real property and royalties for US intellectual property use are also US-sourced. Interest income and dividends are typically US-sourced if the payer is a US resident or corporation, with some exceptions.

US-sourced income for nonresident aliens falls into two main categories: Effectively Connected Income (ECI) and Fixed, Determinable, Annual, or Periodical (FDAP) income. ECI is income effectively connected with a US trade or business, taxed at graduated rates like US citizens and residents, allowing for related deductions. Examples include US business income or compensation for US services.

FDAP income includes passive income like interest, dividends, rents, and royalties not effectively connected with a US trade or business. This income is generally taxed at a flat 30% rate on the gross amount, without deductions, and is often collected through withholding at the source.

Tax treaties between the United States and other countries can reduce or eliminate US tax on certain US-sourced income for non-residents. These treaties often provide reduced withholding rates on FDAP income or modify ECI definitions, preventing double taxation and encouraging international commerce. Treaty provisions can override general Internal Revenue Code rules.

Additional Reporting Requirements

Beyond income tax obligations, US persons living abroad, including citizens and green card holders, have several non-income tax reporting requirements. One is the Report of Foreign Bank and Financial Accounts (FBAR), FinCEN Form 114, filed electronically with the Financial Crimes Enforcement Network (FinCEN), not the IRS.

An FBAR filing is required if a US person has a financial interest in, or signature authority over, one or more foreign financial accounts, and their aggregate value exceeds $10,000 at any time during the calendar year. This threshold applies to the combined value of all qualifying foreign accounts. Reportable accounts include bank accounts, brokerage accounts, mutual funds, and certain foreign-issued life insurance policies.

The Foreign Account Tax Compliance Act (FATCA) introduced another reporting requirement through Form 8938, Statement of Specified Foreign Financial Assets, filed with the taxpayer’s annual income tax return. FATCA ensures US taxpayers with foreign financial assets report information about those assets to the IRS, enhancing transparency and combating offshore tax evasion.

The thresholds for filing Form 8938 vary by residency and filing status. For single taxpayers living abroad, the threshold is $200,000 on the last day of the tax year or $300,000 at any time. For married individuals filing jointly and living abroad, these thresholds increase to $400,000 on the last day or $600,000 at any time.

Form 8938 requires reporting a broader range of specified foreign financial assets than the FBAR, including financial accounts and certain foreign-held investments not in a financial account. While both FBAR and Form 8938 require reporting foreign assets, they are distinct, and individuals may need to file both if thresholds are met. Other informational forms may be required for specific situations, such as interests in foreign corporations, partnerships, or trusts.