Expat Taxes: What Americans Living Abroad Need to Know

The United States is one of only two countries in the world that taxes its citizens on worldwide income, regardless of where they live. That means if you are an American living in Lisbon, Bangkok, or Mexico City, the IRS still expects to hear from you every April — and potentially collect.

Understanding expat taxes US obligations is not optional. Failing to file can result in penalties starting at $10,000 per form, loss of your passport, and years of compounding headaches. The good news: the tax code also contains powerful exclusions, credits, and treaty provisions that can reduce — and in many cases eliminate — your US tax bill entirely.

This guide covers everything Americans abroad need to know: FBAR, FEIE, the Foreign Tax Credit, FATCA, tax treaties, state taxes, Social Security obligations, estimated payments, and when it makes sense to hire a specialist. Whether you are a remote worker, retiree, or digital nomad, this is the foundation you need before your first overseas tax season.

Citizenship-Based Taxation: Why the US Is Different

Most countries use residence-based taxation — you pay taxes where you live. The US uses citizenship-based taxation. If you hold a US passport or green card, you owe federal income tax on your worldwide income no matter where you earn it or where you sleep at night. The only other country with this system is Eritrea.

This creates a unique problem for American expats: potential double taxation. You might owe taxes both to your country of residence and to the United States on the same income. The FEIE and Foreign Tax Credit exist specifically to address this, but you have to actively claim them. Nothing is automatic.

FBAR: The Filing Requirement Most Expats Miss

The Report of Foreign Bank and Financial Accounts (FBAR, officially FinCEN Form 114) is one of the most overlooked and most punitive requirements for Americans abroad. If the combined value of all your foreign financial accounts exceeds $10,000 at any point during the year, you must file an FBAR electronically through the BSA E-Filing System by April 15 (with an automatic extension to October 15).

“Financial accounts” includes checking, savings, investment accounts, and any account where you have signature authority — even if you do not own it. This catches more people than you might expect. A joint account with a non-US spouse, a business account you are authorized to sign on, or a foreign brokerage account all count.

The penalties for non-compliance are severe: up to $10,000 per account per year for non-willful violations, and up to $100,000 or 50% of the account balance (whichever is greater) for willful violations. The IRS has been aggressive about enforcing FBAR compliance since 2010, and ignorance is not a reliable defense. If you have been abroad and have not filed, the Streamlined Filing Compliance Procedures offer a way to come into compliance without facing the full penalty structure.

FEIE vs Foreign Tax Credit: The Core Decision

These are the two primary tools American expats use to avoid double taxation. You can use one or both, but the strategy you choose has significant implications. Here is how they compare:

When to Use the FEIE

The Foreign Earned Income Exclusion (Form 2555) lets you exclude up to $126,500 (2024 tax year, adjusted annually for inflation) of foreign-earned income from your US return. To qualify, you must pass either the Physical Presence Test (330 full days outside the US in any 12-month period) or the Bona Fide Residence Test (established tax residency in a foreign country for an entire calendar year).

The FEIE is most valuable if you live in a low-tax or zero-tax country like the UAE, Panama, or Paraguay. In those cases, you are not paying much (or any) foreign tax, so there is little to claim as a credit. The FEIE simply removes the income from your US return, and you owe nothing on either end.

The FEIE also includes a Housing Exclusion that can shelter additional income used for qualifying housing expenses (rent, utilities, insurance — not mortgage payments). The housing limit varies by city, with expensive locations like London, Hong Kong, and Tokyo offering higher exclusion amounts.

When to Use the Foreign Tax Credit

The Foreign Tax Credit (Form 1116) works differently: instead of excluding income, it gives you a dollar-for-dollar credit against your US tax liability for taxes you have already paid to a foreign government. If you live in a country with a tax rate equal to or higher than the US (Germany, France, Japan, Scandinavian countries), the FTC often eliminates your entire US bill and may generate carryover credits for future years.

The FTC also covers investment and passive income — dividends, rental income, capital gains — which the FEIE does not. For expats with significant investment portfolios or rental properties, the FTC is usually the better strategic choice.

You can use both: claim the FEIE on your earned income up to the exclusion limit, and the FTC on investment income or earned income above the exclusion. However, you cannot use the FTC on income that was already excluded by the FEIE. Planning these together is where an expat CPA earns their fee.

FATCA: The Reporting Requirement That Shook Global Banking

The Foreign Account Tax Compliance Act (FATCA) was signed into law in 2010 and has fundamentally changed what it means to be an American abroad. FATCA requires foreign financial institutions to report accounts held by US citizens to the IRS. Banks that refuse face a 30% withholding penalty on their US-source income.

On the individual side, FATCA requires you to file Form 8938 (Statement of Specified Foreign Financial Assets) if your foreign assets exceed $200,000 at year-end or $300,000 at any point during the year (thresholds for single filers living abroad). This overlaps with but does not replace the FBAR — you may need to file both.

The practical impact of FATCA goes beyond paperwork. Many foreign banks have started refusing American customers entirely because the compliance burden is not worth it. If you are planning a move abroad, research banking options early. Countries with strong US financial ties (UK, Canada, Australia) tend to have banks that still accept Americans. Smaller countries may be more difficult. Services like Wise and Charles Schwab International are popular fallback options.

Tax Treaties: Country-Specific Relief

The US has income tax treaties with over 60 countries. These treaties can provide additional benefits beyond the FEIE and FTC, including reduced withholding rates on dividends, interest, and royalties, as well as tie-breaker rules that determine your tax residency when both countries claim you.

Treaty benefits vary significantly by country. Some key examples:

• United Kingdom: Comprehensive treaty that coordinates pension taxation and provides reduced withholding on investment income.
• Germany: Treaty includes provisions for self-employment income and a Social Security totalization agreement.
• Japan: Reduced withholding on dividends (10% instead of 30%) and clear rules for employment income earned in Japan.
• Portugal: Treaty covers pension income and prevents double taxation on Social Security benefits.
• Canada: One of the most extensive US treaties, with detailed provisions for cross-border workers and retirement income.

Countries without a US tax treaty (including many popular expat destinations like Brazil, Vietnam, and most Central American nations) leave you relying entirely on the FEIE and FTC for relief. This does not mean you will be double-taxed — it just means you have fewer tools to work with.

State Taxes: The Obligation That Follows You

Federal taxes get most of the attention, but state taxes can blindside expats who assume leaving the country means leaving their state behind. Several states continue to consider you a tax resident even after you move abroad unless you take specific steps to establish domicile elsewhere.

The worst offenders:

• California: Notoriously aggressive. The Franchise Tax Board may claim you are still a resident if you maintain ties (property, bank accounts, voter registration, a California driver’s license). Safe harbor rules effectively require you to be gone for 18+ months with minimal connections.
• New York: Similar to California. Maintaining a “permanent place of abode” in New York while abroad can trigger continued tax liability.
• Virginia, New Mexico, South Carolina: These states have residency rules that can trap expats who have not formally severed ties.

The cleanest strategy: before moving abroad, establish domicile in a no-income-tax state (Texas, Florida, Nevada, Wyoming, Washington, South Dakota, Tennessee, Alaska, or New Hampshire). This means getting a driver’s license, registering to vote, and maintaining a mailing address there. Many expats use family addresses or mail-forwarding services in these states. It is a small logistical step that can save thousands of dollars per year in state income taxes.

Social Security and Medicare: What You Still Owe

This catches many expats off guard: the FEIE does not exempt you from self-employment tax (Social Security and Medicare, currently 15.3% combined). If you are self-employed, freelancing, or running your own business abroad, you owe SE tax on your worldwide net self-employment income even if the FEIE reduces your federal income tax to zero.

There are two potential escape routes:

• Totalization agreements: The US has Social Security agreements with about 30 countries. If you live in a country with a totalization agreement (most of Western Europe, Canada, Australia, Japan, South Korea), you pay into that country’s social security system instead of the US system. This eliminates US SE tax but also means those years do not count toward US Social Security credits.
• Foreign employer: If you are employed by a foreign company (not a US company and not self-employed), you generally do not owe US Social Security or Medicare tax. The employer pays into the local country’s system instead.

If neither exception applies, budget for that 15.3% on top of whatever your actual tax bill looks like. It is the single biggest tax surprise for newly minted expat freelancers.

Estimated Tax Payments: Quarterly Deadlines Still Apply

Living abroad does not change the IRS requirement to make estimated quarterly payments if you expect to owe $1,000 or more in taxes for the year. The due dates are the same as domestic filers: April 15, June 15, September 15, and January 15 of the following year.

Expats do get an automatic 2-month extension to file their return (to June 15), and can request a further extension to October 15. However, extension to file is not extension to pay. Interest accrues from April 15 on any unpaid balance regardless of filing extensions. Set up IRS Direct Pay or EFTPS (Electronic Federal Tax Payment System) before you leave the US to make quarterly payments from abroad without complications.

When to Hire an Expat CPA

Some expat tax situations are straightforward enough to handle with tax software. Others are not. Here is a practical decision framework:

You can probably DIY if:

• You have W-2 income from a US employer and no foreign accounts over $10,000
• Your only foreign income is below the FEIE limit and you have no investment income
• You live in a country with a clear US tax treaty

Hire an expat CPA if:

• You are self-employed or own a business abroad
• You have both earned and investment income in multiple currencies
• You own foreign rental properties or hold foreign partnerships
• You are behind on filing and need to use the Streamlined Procedures
• You are making the FEIE vs FTC election for the first time and want to optimize
• You have a foreign spouse and need to navigate filing status rules
• Your total foreign accounts exceed $200,000 (FATCA threshold)

Expect to pay $500–$2,500 for an expat tax return depending on complexity. Firms like Greenback Expat Tax Services, Bright!Tax, and MyExpatTaxes specialize in this space. The cost is real, but the penalty for getting it wrong is far higher. A single missed FBAR can cost you $10,000 — the CPA pays for itself the first year.

Key Deadlines at a Glance

• April 15: Standard tax return deadline and first estimated payment. Also the FBAR initial deadline (auto-extended to October 15).
• June 15: Automatic 2-month extension for expats who qualify. Second estimated payment due.
• September 15: Third estimated payment due.
• October 15: Extended filing deadline (if requested). FBAR final deadline.
• January 15: Fourth estimated payment for the prior year.

The Bottom Line

American expat taxes are more complex than domestic filing, but they are not unmanageable. The core framework is straightforward: file your return, report your foreign accounts, and use the FEIE or FTC (or both) to minimize double taxation. Layer on treaty benefits and smart state-tax planning, and most expats end up owing little or nothing to the IRS.

The biggest mistake is not the taxes themselves — it is ignoring the filing requirements entirely. The IRS has more visibility into foreign accounts than ever before thanks to FATCA, and the penalties for non-compliance are steep. Start clean, file on time, and get professional help when the situation warrants it.

Your choice of destination also matters for your tax picture. Countries with territorial tax systems, low income tax rates, or strong US treaties can dramatically simplify your situation. If taxes are a major factor in your relocation decision, use our country comparison tool to evaluate destinations side-by-side, or see how cost of living compares to understand the full financial picture.