Understand US tax obligations for citizens and green card holders living abroad. Learn about citizenship-based taxation, income exclusions, foreign tax credits, and essential reporting requirements.
The United States employs a unique tax system that requires its citizens and long-term residents to fulfill tax obligations regardless of their physical location. This principle, known as citizenship-based taxation, means individuals living and working abroad may still be subject to U.S. income tax on their worldwide earnings. Navigating these requirements involves understanding specific definitions, reporting thresholds, and mechanisms to mitigate potential double taxation.
The United States tax system operates on the principle of citizenship-based taxation. This means U.S. citizens and resident aliens are generally taxed on their worldwide income, regardless of where they live or earn that income. This approach differs from most other countries, which typically tax individuals based on their residency. Consequently, a U.S. person living abroad remains subject to U.S. tax laws and reporting requirements.
A “U.S. person” for tax purposes encompasses U.S. citizens, lawful permanent residents (Green Card holders), and individuals who meet the substantial presence test. This broad definition ensures that a wide range of individuals with ties to the U.S. are included in the tax net. This includes those born abroad to U.S. citizen parents or naturalized citizens.
The “worldwide income” principle dictates that all income, regardless of its source or location, is subject to U.S. taxation. This includes wages, self-employment income, investment income like dividends, interest, capital gains, and rental income from foreign properties. The U.S. tax system does not distinguish between income earned domestically and income earned internationally for the purpose of its initial tax imposition.
Tax residency, determined by citizenship or green card status, is distinct from physical residency. An individual can reside physically in a foreign country for years while still maintaining U.S. tax residency.
U.S. persons living abroad can utilize specific tax provisions to reduce or eliminate their U.S. tax liability and prevent double taxation. The primary mechanisms for this are the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC).
The Foreign Earned Income Exclusion allows qualifying individuals to exclude a certain amount of their foreign earned income from their U.S. taxable income. For the 2024 tax year, the maximum exclusion amount is $126,500 per qualifying individual. If both spouses qualify, they can potentially exclude up to $253,000.
To be eligible for the FEIE, an individual must have foreign earned income and meet either the Bona Fide Residence Test or the Physical Presence Test. Foreign earned income includes wages, salaries, or professional fees for services performed in a foreign country. It does not include passive income such as dividends, interest, capital gains, or pension payments.
The Bona Fide Residence Test requires an individual to be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. Establishing bona fide residency involves demonstrating closer ties to the foreign country, such as setting up permanent living quarters and having no immediate intention to return to the U.S. Brief trips back to the U.S. for vacation or business are generally allowed as long as the intent to return to the foreign residence remains clear.
The Physical Presence Test requires an individual to be physically present in a foreign country for at least 330 full days during any consecutive 12-month period. This 12-month period does not need to align with the calendar year.
Claiming the FEIE is done by filing Form 2555, Foreign Earned Income, with the annual U.S. income tax return. Taxpayers must gather information like dates of physical presence or proof of foreign residence to determine eligibility and calculate the exclusion. The exclusion can affect other deductions and credits, requiring careful planning.
The Foreign Tax Credit (FTC) allows U.S. persons to reduce their U.S. income tax liability dollar-for-dollar by the amount of income taxes paid or accrued to a foreign country. This credit prevents individuals from being taxed twice on the same income by both the U.S. and a foreign government. It is beneficial for those living in countries with higher income tax rates than the U.S.
To be eligible for the FTC, the tax paid must be a legal foreign income tax, or a tax paid in lieu of an income tax, imposed on the U.S. person. The tax must be paid or accrued by the U.S. person and on foreign source income. The credit cannot be claimed for taxes that are not income taxes, such as value-added taxes (VAT) or property taxes.
The amount of FTC that can be claimed is limited to the portion of the U.S. tax liability attributable to foreign source income. This limitation is calculated using a fraction where the numerator is foreign source taxable income and the denominator is total worldwide taxable income. This ensures that the credit only offsets U.S. tax on foreign income, not on U.S. source income. If creditable foreign taxes paid or accrued exceed the annual limitation, the unused portion may be carried back one year and then forward for up to 10 years. This allows taxpayers to utilize excess foreign tax credits in other tax periods.
To claim the FTC, individuals use Form 1116, Foreign Tax Credit, which requires documentation of foreign tax payments and details of the foreign income that generated those taxes.
Meeting U.S. tax obligations while living abroad extends beyond filing an income tax return. It encompasses information reporting requirements for foreign accounts and assets, necessitating detailed record-keeping and specific filing procedures.
U.S. persons must report foreign financial accounts and assets, primarily through the Report of Foreign Bank and Financial Accounts (FBAR) and Form 8938 under the Foreign Account Tax Compliance Act (FATCA). These are distinct but often overlapping requirements.
The FBAR, formally FinCEN Form 114, is an annual report of foreign financial accounts filed electronically with the Financial Crimes Enforcement Network (FinCEN). It is required if a U.S. person has a financial interest in, or signature authority over, one or more foreign financial accounts, and the aggregate value of all such accounts exceeded $10,000 at any point during the calendar year. This threshold applies to the combined maximum value of all foreign accounts.
Reportable accounts for FBAR purposes include bank accounts, brokerage accounts, mutual funds, and certain foreign retirement accounts. Filers need specific information for each account, including institution details, account numbers, types, and maximum values. This form is not filed with the IRS but directly through FinCEN’s BSA E-Filing System.
The Foreign Account Tax Compliance Act (FATCA) introduced Form 8938, Statement of Specified Foreign Financial Assets, which is filed with the annual income tax return. This form requires U.S. persons to report specified foreign financial assets if their value exceeds certain thresholds. These thresholds vary based on filing status and whether the individual resides in the U.S. or abroad.
Specified foreign financial assets reportable on Form 8938 include foreign financial accounts, foreign stocks or securities not held in a financial account, foreign mutual funds, interests in foreign entities like partnerships or trusts, and certain foreign-issued life insurance or annuity contracts with cash value. Information required includes asset descriptions, maximum values, and any income received. While FBAR and Form 8938 both report foreign assets, they have different thresholds and cover different types of assets.
The process of filing U.S. tax returns and related reports from abroad involves adhering to specific deadlines and submission methods. Form 2555 (for FEIE) and Form 1116 (for FTC) are attachments to the main Form 1040, U.S. Individual Income Tax Return, and are submitted along with it.
U.S. expats generally receive an automatic two-month extension to file their Form 1040, shifting the deadline from April 15 to June 15. For the 2024 tax year, the extended deadline is June 16, 2025. An additional extension to October 15, 2025, can be requested, but this extends only the filing deadline, not the payment deadline. Any taxes owed are still due by April 15, 2025, to avoid interest and penalties.
Form 1040 can be submitted electronically through approved tax software or by mail to the specific IRS address for taxpayers abroad. Taxes owed can be paid electronically via IRS Direct Pay or electronic funds withdrawal, or by mailing a check or money order to the IRS.
The FBAR (FinCEN Form 114) must be filed electronically through FinCEN’s BSA E-Filing System. Individual filers do not need to register for an account to submit their FBAR. The FBAR deadline is April 15, but there is an automatic extension to October 15, which does not require a separate request.
Form 8938 is filed as part of the annual income tax return (Form 1040). Its due date aligns with the tax return’s due date, including any extensions obtained for Form 1040.
For U.S. persons who have not met their tax and reporting obligations in previous years, the IRS offers programs such as the Streamlined Foreign Offshore Procedures. These procedures provide a pathway to become compliant by submitting delinquent tax returns and FBARs, often with reduced penalties.