Do You Have to Pay US Taxes If You Live Abroad?

The United States employs a unique tax system that requires its citizens and green card holders to report their worldwide income, regardless of where they reside. This means that individuals living outside the US are generally still subject to US tax obligations on all income earned globally. Understanding these responsibilities is important for US persons abroad to ensure compliance with tax laws. Navigating these international tax rules can be complex, making it necessary to be aware of the specific requirements that apply. Ignoring these obligations can lead to significant penalties and complications.

The Principle of US Citizenship Taxation

The United States tax system operates on a principle known as citizenship-based taxation, which is distinct from the residency-based systems common in most other countries. This fundamental approach dictates that US citizens and lawful permanent residents, also known as green card holders, are subject to US income tax on their worldwide earnings. This obligation applies irrespective of where they live, where their income is generated, or whether they also pay taxes to another country.

This comprehensive taxation means that all forms of income, regardless of their source, are potentially subject to US tax. This includes wages and salaries earned from foreign employment, self-employment income from overseas businesses, and various types of investment income such as dividends, interest, and capital gains. Rental income from foreign properties also falls under this broad definition of taxable income.

For example, an American citizen working in a foreign country who receives a salary from a non-US employer must still report that income to the IRS. Similarly, a green card holder living abroad and earning investment income from a foreign brokerage account is obligated to report those earnings. This broad scope of taxation distinguishes the US from most other nations, which only tax income earned within their borders or by their residents.

Reducing Your US Tax Liability Abroad

While the US taxes its citizens and green card holders on worldwide income, several mechanisms exist to help reduce or eliminate double taxation and manage the US tax burden for those living abroad. These provisions are designed to prevent individuals from paying taxes on the same income to both the US and their country of residence. Understanding the eligibility criteria and application of these tools is important for effective tax planning.

One of the most significant benefits available is the Foreign Earned Income Exclusion (FEIE), which allows eligible individuals to exclude a certain amount of their foreign earned income from US taxation. For the 2024 tax year, the maximum exclusion amount is $126,500, and this amount is adjusted annually for inflation. To qualify for the FEIE, individuals must meet specific tests related to their presence and residence abroad.

The Bona Fide Residence Test requires an individual to be a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. Alternatively, the Physical Presence Test is met if an individual is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

The FEIE applies only to foreign earned income, which includes wages, salaries, professional fees, and self-employment income. It does not apply to passive income sources such as dividends, interest, capital gains, or most rental income. Furthermore, while the FEIE reduces taxable income, it does not reduce self-employment taxes (Social Security and Medicare taxes) for self-employed individuals working abroad. Form 2555 is the specific IRS form used to claim the Foreign Earned Income Exclusion.

In addition to the FEIE, individuals who qualify for it may also be able to claim a Foreign Housing Exclusion or Deduction. This provision helps cover qualified housing expenses that exceed a base amount.

Qualified housing expenses can include rent, utilities (excluding telephone charges), real estate taxes, and property insurance premiums. For the 2024 tax year, the base housing amount is 16% of the FEIE, which calculates to $20,240. Only housing expenses exceeding this base amount are eligible for exclusion or deduction. The maximum amount of qualified housing expenses that can be excluded or deducted is limited to 30% of the FEIE, which is $37,950 for the 2024 tax year, though higher limits may apply in designated high-cost localities. Employees claim the Foreign Housing Exclusion, while self-employed individuals claim the Foreign Housing Deduction.

Another powerful tool for reducing US tax liability is the Foreign Tax Credit (FTC). This credit allows taxpayers to reduce their US income tax liability dollar-for-dollar for income taxes paid or accrued to a foreign country. The FTC is particularly useful for foreign income that is not covered by the FEIE, such as passive income, or for earned income that exceeds the FEIE limit.

To claim the FTC, the foreign tax must be a legal and actual foreign income tax, or a tax in lieu of an income tax. Unused foreign tax credits can often be carried back one year and forward ten years, providing flexibility in managing tax liabilities over time. Taxpayers use Form 1116 to calculate and claim the Foreign Tax Credit.

Choosing between the FEIE and the FTC requires careful consideration, as they generally cannot be claimed for the same income. If foreign taxes paid are higher than the US tax on that income, the FTC might be more advantageous, as it can potentially offset more US tax and even generate carryovers. Conversely, if foreign income is below the FEIE limit and foreign taxes are low or non-existent, the FEIE might be simpler and more beneficial. Once an election to use the FEIE is revoked, it cannot be claimed again for five years without IRS consent.

Self-employed individuals living abroad face an additional consideration regarding self-employment taxes, which fund Social Security and Medicare. The FEIE does not reduce this tax. However, the US has entered into “Totalization Agreements” with 25 foreign countries to prevent dual Social Security taxation. These agreements ensure that individuals are subject to Social Security taxes only in one country, where they have their primary economic attachment. If a Totalization Agreement applies, a self-employed individual may be exempt from US self-employment taxes if they are contributing to the social security system of a treaty country. Obtaining a Certificate of Coverage from the foreign country’s social security agency is required to substantiate this exemption.

Reporting Foreign Assets and Accounts

Beyond income tax obligations, US persons living abroad have important reporting requirements related to their foreign financial assets and accounts, even if no tax is owed. Failure to comply with these separate reporting mandates can result in severe penalties. The two primary forms are the Report of Foreign Bank and Financial Accounts (FBAR) and the Statement of Specified Foreign Financial Assets (Form 8938) under the Foreign Account Tax Compliance Act (FATCA).

The FBAR, formally known as FinCEN Form 114, is a reporting requirement for foreign financial accounts. It is not a tax form but an information report filed with the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of the Treasury, not the IRS. Any US person, including citizens, green card holders, and certain entities, must file an FBAR if they have a financial interest in or signature authority over foreign financial accounts.

The filing threshold for FBAR is met if the aggregate value of all foreign financial accounts exceeds $10,000 at any point during the calendar year. This includes a wide range of account types, such as bank accounts, brokerage accounts, mutual funds, and even some foreign pension plans. The requirement is triggered even if the combined balance surpasses the threshold for only a single day. FBARs must be filed electronically. Penalties for non-compliance can be severe, including both civil and criminal penalties.

The Foreign Account Tax Compliance Act (FATCA) introduced Form 8938, Statement of Specified Foreign Financial Assets, which is filed with the IRS as part of the annual income tax return. FATCA’s purpose is to increase transparency regarding US persons’ foreign financial assets and deter offshore tax evasion. US persons, including citizens and green card holders, must file Form 8938 if the total value of their specified foreign financial assets exceeds certain thresholds.

The thresholds for filing Form 8938 are higher for those living abroad compared to those residing in the US. For single individuals or those married filing separately and living abroad, the threshold is $200,000 on the last day of the tax year or $300,000 at any time during the year. For married individuals filing jointly and living abroad, these thresholds double to $400,000 on the last day of the year or $600,000 at any time during the year.

Specified foreign financial assets reportable on Form 8938 include financial accounts maintained by foreign financial institutions, foreign stocks or securities not held in an account, foreign partnership interests, and certain foreign-issued life insurance or annuity contracts. It is important to understand that FBAR and Form 8938 are distinct reporting requirements. While there can be overlap in the types of assets reported, they have different thresholds and are filed with different government agencies. One does not replace the other, and taxpayers may be required to file both. Failure to file Form 8938 can also lead to significant penalties, including an initial $10,000 fine and additional penalties for continued non-compliance.

Filing Your US Tax Return from Abroad

Once the principles of US taxation, methods for reducing liability, and foreign asset reporting requirements are understood, the final step involves the procedural aspects of filing the necessary forms. Even if no tax is owed due to exclusions or credits, a US tax return must still be filed if an individual’s income exceeds the standard filing threshold. This ensures compliance and formalizes the claim for any exclusions or credits.

US citizens and residents living abroad receive an automatic two-month extension to file their tax returns, moving the deadline from April 15 to June 15. If more time is needed, an additional extension to October 15 can be requested by filing Form 4868. It is important to remember that while these extensions provide more time to file, interest may still accrue on any unpaid taxes from the original April 15 deadline.

Taxpayers abroad have options for submitting their returns. Electronic filing (e-file) is widely available through tax software or with the assistance of tax professionals, offering a secure and efficient method. For those who prefer or need to mail a physical return, specific IRS addresses are designated for international filers.

Several forms are commonly submitted by US persons living abroad. Form 1040 is the primary US Individual Income Tax Return. To claim the Foreign Earned Income Exclusion, Form 2555 must be included with the return. If foreign income taxes were paid and a credit is being claimed against US tax liability, Form 1116, Foreign Tax Credit, is required. Additionally, if the thresholds for reporting foreign assets are met, Form 8938, Statement of Specified Foreign Financial Assets, is attached to the tax return.

It is also important to remember FinCEN Form 114, the FBAR, which reports foreign bank and financial accounts. Although it is filed separately with FinCEN and not the IRS, its due date is April 15, with an automatic extension to October 15, aligning it closely with the tax return filing period. After filing, taxpayers can receive confirmation of receipt for e-filed returns and track the status of any refunds.