Learn about your relief provisions as an American abroad before paying income tax to two countries on the same earnings.
December 7, 2025
The Association of Americans Resident Overseas (AARO) estimates that 5.5 million Americans live abroad, facing taxation by both their country of residence and the United States.
The Foreign Earned Income Exclusion, Foreign Tax Credit, and tax treaty benefits can eliminate or substantially reduce this double taxation. Compare our best tax relief services to find expert support designed for expat tax situations.
The United States is one of only two countries that taxes citizens based on citizenship rather than residence, requiring Americans abroad to file U.S. tax returns and report all worldwide income.
U.S. citizens and green card holders must file annual tax returns if their worldwide income exceeds the IRS filing thresholds, even when living permanently overseas. For 2025, the thresholds are $14,600 for single filers under 65, $29,200 for married filing jointly, and $21,900 for head of household.
Without relief provisions, Americans abroad pay income tax to both their country of residence and the United States on the same earnings. An American software engineer in Berlin earning €80,000 ($87,000) pays German income tax of approximately €24,000. Without U.S. tax relief provisions, she would also owe U.S. federal tax on that $87,000.
The most common misconception I encounter is that expats believe paying foreign taxes exempts them from U.S. filing requirements. You must always file a U.S. return, but the Foreign Earned Income Exclusion and Foreign Tax Credit typically eliminate or drastically reduce actual tax owed. Failing to file costs clients an average of $3,000-8,000 annually in missed tax relief.
The Foreign Earned Income Exclusion allows qualifying Americans to exclude up to $126,500 (2025) of foreign wages from U.S. taxation.
To claim FEIE, you must meet three requirements: tax home in a foreign country, foreign earned income, and either the physical presence test or bona fide residence test.
FEIE applies only to earned income from employment or self-employment services performed in foreign countries.
Qualifying income:
Income that doesn't qualify:
I frequently see expats mistakenly try to exclude their worldwide passive income, which triggers audits and penalties.
How to claim: File Form 2555 with your annual tax return. The exclusion amount is prorated if you qualify for less than a full year.
The Foreign Tax Credit provides a dollar-for-dollar reduction of U.S. tax liability for foreign income taxes paid, often benefiting high earners more than FEIE. Unlike FEIE, the Foreign Tax Credit doesn't exclude income, but reduces your U.S. tax by the amount of foreign taxes already paid.
Example: You earn $150,000 and pay $35,000 in Japanese income tax. Your U.S. tax would be approximately $33,000. The Foreign Tax Credit eliminates all U.S. tax and creates a $2,000 credit carryforward.
My methodology focuses on three factors:
Income level
Foreign tax rate
Income composition
If you earn under $126,500 in a country with tax rates below 20%, FEIE typically wins. Above $150,000 in high-tax countries like Germany or Japan, FTC usually provides greater savings.
Pro tip: Claim the Foreign Tax Credit using Form 1116. You can carry back excess foreign tax credits one year or carry forward ten years.
Beyond income tax returns, Americans abroad face additional reporting obligations for foreign financial accounts and assets.
FinCEN requires Americans to report all foreign financial accounts if the aggregate value exceeds $10,000 at any point during the year. File FinCEN Form 114 electronically by the tax deadline (with automatic extension to October 15).
Reportable accounts include:
FBAR penalties range from $10,000 per violation (non-willful) to the greater of $100,000 or 50% of the account balance (willful).
Form 8938 must be filed with your tax return if your foreign assets exceed these thresholds:
Single filers:
Foreign Bank Account Report (FBAR) reports accounts to FinCEN (Treasury), while FATCA reports assets to the IRS. Different forms, different thresholds, different penalties. Missing FBAR carries criminal prosecution risk, while missing FATCA triggers civil penalties starting at $10,000 per form.
The U.S. maintains tax treaties with dozens of countries, providing additional relief beyond FEIE and FTC. Claiming treaty benefits requires filing Form 8833.
Americans working remotely from abroad for U.S. employers can claim FEIE if they meet physical presence or bona fide residence tests. The key factor is where you physically perform the work, not where your employer is located.
U.S. employers may continue withholding U.S. taxes, but you'll receive a tax refund when filing.
Self-employed Americans can exclude foreign-earned income through FEIE, but self-employment tax (15.3%) still applies unless you live in a country with a totalization agreement. For self-employed expats, the strategy depends on your totalization agreement status.
If your country has an agreement, get a certificate of coverage to avoid double social security taxation. Without an agreement, consider the S-corporation structure once earnings exceed $100,000.
Dual citizens with U.S. citizenship must file U.S. tax returns regardless of where they were born or raised. Many successfully use FEIE or FTC to eliminate U.S. tax liability, but compliance costs create burdens even when no tax is owed.
Americans abroad automatically receive a two-month tax extension to June 15 for filing tax returns. You can extend further to October 15 by filing Form 4868. However, any taxes owed remain due by the original April deadline.
Report all foreign income and expenses in U.S. dollars using the Treasury Department's yearly average exchange rates or another reputable source like OANDA or XE.
I recommend hiring tax professionals when your situation includes:
Average expat tax preparation costs range from $500-1,500, while self-preparation software costs $100-300.
Americans living abroad can avoid double taxation by using the Foreign Earned Income Exclusion, Foreign Tax Credit, and tax treaties. These programs allow most expats to eliminate or substantially reduce their U.S. tax liability, provided they meet eligibility requirements and file the necessary forms.
To maximize relief, expats should determine the best exclusion or credit for their situation, keep detailed records of foreign taxes and time spent abroad, and file required FBAR and FATCA reports. Professional tax guidance is often valuable for ensuring compliance and optimizing tax outcomes.
1. Do I have to file U.S. taxes if I already pay taxes in my country of residence?
Yes, U.S. citizens and green card holders must file U.S. tax returns reporting worldwide income regardless of foreign tax payments. However, FEIE and FTC typically eliminate or reduce U.S. tax owed.
2. Can I use both FEIE and FTC on the same income?
No, you can't claim both on the same income. However, you can use FEIE on earned income and FTC on passive income, or FEIE up to the exclusion limit and FTC on earnings above that threshold.
3. What happens if I don't file FBAR or FATCA forms?
FBAR penalties range from $10,000 per violation (non-willful) to the greater of $100,000 or 50% of the account balance (willful). FATCA penalties start at $10,000 per missed form. The IRS offers streamlined filing procedures for unintentional failures.
Orville Marshall is a tax expert at BestMoney.com. An Enrolled Agent with over 10 years of experience, he specializes in tax preparation and consulting for individuals and businesses. Orville holds an MBA in Business Administration from Nova Southeastern University and a degree in Accounting & Management Studies from The University of the West Indies, bringing extensive expertise in tax management and technology-driven solutions to his work.
