Overseas Taxation: Filing Taxes as a U.S. Expat

The United States uses a citizenship-based taxation system, meaning U.S. citizens and resident aliens must report their worldwide income to the Internal Revenue Service (IRS) regardless of where they live. This obligation exists even if you earn all your income in a foreign country. This system can lead to double taxation, where income is taxed by both your country of residence and the U.S. To address this, the tax code contains provisions like credits and exclusions to provide relief for taxpayers abroad.

Core Exclusions and Credits for Individuals

The Foreign Earned Income Exclusion (FEIE) is a primary tool for avoiding double taxation, allowing qualifying individuals to exclude a portion of their foreign-earned income from U.S. taxes. For the 2025 tax year, the maximum exclusion is $130,000 per person. If your foreign earned income is below this amount and you meet the requirements, you may not owe any U.S. income tax.

The exclusion applies to earned income like wages and self-employment earnings, but not to passive income such as interest or dividends. If both spouses qualify, they can each claim the FEIE, potentially excluding up to $260,000 of combined income. The maximum exclusion must be prorated if you only qualify for part of the tax year.

Eligibility Tests for FEIE

To qualify for the FEIE, your tax home must be in a foreign country, and you must meet either the Bona Fide Residence Test or the Physical Presence Test. These tests establish your connection to a foreign country. The choice between them depends on your living and working situation abroad.

The Bona Fide Residence Test is based on your intention to reside in a foreign country for an extended period. To meet this test, you must be a resident of a foreign country for an uninterrupted period that includes an entire tax year, from January 1 to December 31. The IRS assesses factors like having a long-term visa, a permanent home, and integration into the local community. Brief trips back to the U.S. are permitted.

The Physical Presence Test is a mathematical test based on time spent abroad. To qualify, you must be physically present in a foreign country for at least 330 full days during any consecutive 12-month period. The 330 days do not need to be consecutive, and the 12-month period can begin on any day of the year. This test is often used by individuals on specific-term assignments.

Foreign Housing Exclusion and Deduction

Qualifying individuals can also claim a benefit for housing costs through the Foreign Housing Exclusion or Deduction. The exclusion is for employees with employer-funded housing, while the deduction is for self-employed individuals. To be eligible, you must first qualify for the FEIE.

This benefit is calculated based on qualified foreign housing expenses, such as rent, utilities, and renter’s insurance. You must subtract a base housing amount, which for 2025 is $20,800 (16% of the maximum FEIE). Your exclusion or deduction is the amount of your qualified housing expenses that exceeds this base. A ceiling on claimable expenses is generally 30% of the maximum FEIE, but this can be higher in designated high-cost areas.

Conceptual Choice (FEIE vs. FTC)

Another tool for avoiding double taxation is the Foreign Tax Credit (FTC). The FTC provides a dollar-for-dollar reduction of your U.S. tax liability for income taxes paid to a foreign government. Unlike the FEIE, which excludes income, the FTC is a credit that directly reduces the tax you owe.

Choosing between the FEIE and FTC depends on the tax rate in your country of residence. If you live in a high-tax country, the FTC is often more advantageous as it can offset your U.S. tax liability. If you are in a low or no-tax country, the FEIE is generally better. You can use both in the same year, but not on the same income.

Required Information and Key Tax Forms

Additional Reporting for Foreign Assets

Filing and Payment Procedures for Expatriates

State and Social Security Tax Considerations