Pub. 54: Tax Rules for U.S. Citizens & Resident Aliens Abroad

IRS Publication 54 is a guide for U.S. citizens and resident aliens on their tax obligations while living abroad. The United States taxes its citizens on worldwide income, which means you may have a U.S. tax filing responsibility even if you live and work outside the country for the entire year. This guide outlines who must file, when returns are due, and the special rules, such as exclusions and credits, that can help reduce or eliminate U.S. tax liability on income earned in a foreign country.

Filing Requirements for Americans Abroad

The obligation to file a U.S. tax return is determined by your gross income, filing status, and age. For the 2024 tax year, a single individual under 65 must file if their gross income from all sources is at least $14,600. This worldwide income reporting structure means gross income includes amounts you might later exclude, such as through the Foreign Earned Income Exclusion. If you are self-employed, your gross income is calculated before any business deductions are taken.

The IRS provides an automatic filing extension for taxpayers whose tax home and abode are outside the United States and Puerto Rico on the regular due date. This provides an automatic 2-month extension to file, moving the 2024 tax year deadline to June 16, 2025. This is an extension to file, not an extension to pay, and interest will be charged on any tax not paid by the original April 15 deadline.

If more time is needed, you can file Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, for an extension to October 15. In some situations, a taxpayer may request a further extension if more time is needed to meet the eligibility tests for certain foreign tax benefits. These extensions provide time to gather necessary foreign financial documents.

Qualifying for Tax Exclusions

To use the tax benefits available to Americans abroad, you must meet either the Bona Fide Residence Test or the Physical Presence Test. These tests determine if you have a sufficient connection to a foreign country to qualify for exclusions like the Foreign Earned Income Exclusion. Passing one of these tests is a prerequisite for claiming these benefits.

Bona Fide Residence Test

The Bona Fide Residence Test is a qualitative assessment of your life abroad. To meet this test, a U.S. citizen must establish residency in a foreign country for an uninterrupted period that includes an entire tax year (January 1 to December 31). The IRS examines your intentions and the nature of your stay, looking at factors like leasing a long-term apartment, being accompanied by family, and participating in the local community. Brief trips back to the U.S. do not necessarily jeopardize your status, but you will not qualify if you make a statement to foreign authorities that you are not a resident.

Physical Presence Test

The Physical Presence Test is a quantitative measure. To meet this test, a U.S. citizen or resident alien must be physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. A “full day” is a continuous 24-hour period, and any time spent in the U.S. means that day does not count toward the 330-day requirement. The 12-month period can begin on any day of the month, allowing you to configure it to your advantage.

Excluding Foreign Earned Income

Foreign Earned Income Exclusion (FEIE)

The Foreign Earned Income Exclusion (FEIE) allows you to exclude a certain amount of your foreign earned income from U.S. taxation, with a maximum of $126,500 for the 2024 tax year. Foreign earned income includes salaries, wages, and professional fees for personal services performed in a foreign country; it does not include interest, dividends, or capital gains. The exclusion amount must be prorated if you do not meet the qualification tests for the entire tax year, and if you are married, both spouses can claim the FEIE if they independently qualify.

Foreign Housing Exclusion and Deduction

You may also be able to exclude or deduct a portion of your housing costs. This benefit is an exclusion for employees receiving employer-provided funds and a deduction for self-employed individuals. Qualifying housing expenses include reasonable costs like rent and utilities, but not lavish expenses or costs to purchase property. The calculation begins with your total housing expenses, from which a base amount (16% of the maximum FEIE) is subtracted, and is subject to an overall limit (30% of the maximum FEIE), though higher limits exist for certain high-cost localities.

Form 2555, Foreign Earned Income

Form 2555, Foreign Earned Income, is used to claim both the FEIE and the foreign housing exclusion or deduction. On the form, you must specify which eligibility test you meet—the Bona Fide Residence Test or the Physical Presence Test—and provide the relevant dates. The form guides the calculation of your exclusion, and the final amount is carried over to Schedule 1 of Form 1040 to reduce your adjusted gross income.

Claiming the Foreign Tax Credit

As an alternative to excluding foreign earned income, you can claim a credit for income taxes paid to a foreign country. The Foreign Tax Credit (FTC) is a dollar-for-dollar reduction of your U.S. tax liability, designed to mitigate double taxation. You cannot claim a credit for foreign taxes paid on income already excluded using the FEIE. The credit is non-refundable, meaning it can only reduce your liability to zero, but any unused credit may be carried back one year or forward to future years, subject to limitations.

Qualifying Foreign Taxes

Not all taxes paid to a foreign government are eligible for the credit. The tax must be an income tax, or a tax paid in lieu of an income tax, that you have legally paid or accrued. Taxes such as value-added tax (VAT), sales tax, and property taxes are not creditable. Additionally, taxes paid to certain countries may not be eligible for the credit.

Form 1116, Foreign Tax Credit

To claim the FTC, you must file Form 1116, Foreign Tax Credit. On this form, you must categorize your foreign source income, such as into general and passive categories, and report the foreign taxes paid for each. The form includes a calculation for the credit limitation, which prevents the credit from exceeding the U.S. tax you would have paid on that same foreign income. An exception allows taxpayers with no more than $300 ($600 for joint filers) in passive foreign income and creditable taxes to claim the credit directly on Form 1040 without filing Form 1116.

Completing and Submitting Your Return

Submission Process

Taxpayers living abroad can file their returns electronically or by mail. E-filing through IRS-approved software is the most efficient method and provides quick confirmation of receipt. If you mail a paper return, the required mailing address depends on whether you are enclosing a payment, so you must use the correct address listed in the form instructions.

Paying U.S. Taxes from Abroad

All amounts reported on your U.S. tax return must be in U.S. dollars. If you received income or paid expenses in a foreign currency, you must translate those amounts into dollars using a consistent and accepted exchange rate. You can pay any tax due through several methods, such as the free Electronic Federal Tax Payment System (EFTPS), by debit or credit card, or a wire transfer from a foreign bank, though some methods may involve fees.

What to Expect After Filing

After you file, the process is similar to that for domestic filers, though paper returns mailed from abroad may have longer processing times. If you e-file, you will receive an electronic acknowledgment of acceptance from the IRS. You can track the status of any refund on the IRS website, and you should keep a copy of your tax return and all supporting documents for your records.