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The United States is an outlier in the global tax landscape. Along with Eritrea, it is one of the only countries that taxes non-resident citizens on their worldwide income. This means that if you are a US citizen or Green Card holder living in London, Tokyo, or Seoul, you are still subject to the same IRS filing requirements as someone living in New York. This applies to wages, interest, dividends, and rental income earned anywhere in the world.
To mitigate the risk of double taxation, the IRS offers the Foreign Earned Income Exclusion (Form 2555). This allows qualifying expats to exclude a specific amount of their foreign earnings from US income tax. For 2024, this exclusion is over $120,000 per qualifying person.
To qualify, you must pass one of two strict tests: 1. Bona Fide Residence Test: Unlike the physical presence test, this is based on your intentions. You must prove you have established a "bona fide" residence in a foreign country for an uninterrupted period that includes an entire tax year. Factors include the nature of your job, whether you brought your family, and if you are integrating into the community. 2. Physical Presence Test: This is a strictly quantitative test. You must be physically present in a foreign country or countries for at least 330 full days during any consecutive 12-month period. Travel time over international waters or staying in the US for even a minute over the limit can disqualify you.
Housing Exclusion/Deduction: In addition to the income exclusion, you may also be able to deduct or exclude reasonable housing expenses (rent, utilities, insurance) that exceed a certain base amount, up to a location-specific cap.
The FEIE isn't always the best choice. If you live in a high-tax country (like many European nations), you might be better off using the Foreign Tax Credit (Form 1116). This allows you to claim a credit against your US tax bill for income taxes paid to a foreign government.
* *Strategy Note*: If you claim the FTC, you often build up "carryover" credits if the foreign tax rate is higher than the US rate. These can be used in future years to offset US taxes on foreign income. Furthermore, utilizing the FTC allows you to contribute to a US IRA, whereas excluding all your income via FEIE might render you ineligible due to having no "taxable compensation."
Beyond income tax, the US closely monitors foreign financial assets to prevent money laundering and tax evasion.
* FBAR (FinCEN Form 114)**: If the *aggregate* value of all your foreign financial accounts (bank accounts, biokerage, mutual funds, some life insurance) exceeds $10,000 at **any point during the calendar year, you must file an FBAR. This is filed separately from your tax return with the Treasury Department. The penalties for non-willful failure to file can be $10,000 per violation. * FATCA (Form 8938): The Foreign Account Tax Compliance Act requires reporting of specified foreign financial assets if their value generally exceeds $50,000 to $600,000 depending on your filing status and whether you live in the US or abroad. This is filed *with* your income tax return.
If you work for a foreign employer, you might be liable for both US Social Security/Medicare taxes and the foreign equivalent. The US has "Totalization Agreements" with roughly 30 countries to prevent this double Social Security taxation. These agreements generally determine which system covers you, preserving your benefit eligibility in one country while exempting you from taxes in the other.
Essential Tax Rules for US Expats: FEIE, FATCA, and Beyond
Living abroad doesn't exempt US citizens from the IRS. This guide covers the Foreign Earned Income Exclusion, tax treaties, and the critical FBAR requirements.
Citizenship-Based Taxation: A Unique Burden
The United States is an outlier in the global tax landscape. Along with Eritrea, it is one of the only countries that taxes non-resident citizens on their worldwide income. This means that if you are a US citizen or Green Card holder living in London, Tokyo, or Seoul, you are still subject to the same IRS filing requirements as someone living in New York. This applies to wages, interest, dividends, and rental income earned anywhere in the world.
The Foreign Earned Income Exclusion (FEIE)
To mitigate the risk of double taxation, the IRS offers the Foreign Earned Income Exclusion (Form 2555). This allows qualifying expats to exclude a specific amount of their foreign earnings from US income tax. For 2024, this exclusion is over $120,000 per qualifying person.
To qualify, you must pass one of two strict tests: 1. Bona Fide Residence Test: Unlike the physical presence test, this is based on your intentions. You must prove you have established a "bona fide" residence in a foreign country for an uninterrupted period that includes an entire tax year. Factors include the nature of your job, whether you brought your family, and if you are integrating into the community. 2. Physical Presence Test: This is a strictly quantitative test. You must be physically present in a foreign country or countries for at least 330 full days during any consecutive 12-month period. Travel time over international waters or staying in the US for even a minute over the limit can disqualify you.
Housing Exclusion/Deduction: In addition to the income exclusion, you may also be able to deduct or exclude reasonable housing expenses (rent, utilities, insurance) that exceed a certain base amount, up to a location-specific cap.
The Foreign Tax Credit (FTC)
The FEIE isn't always the best choice. If you live in a high-tax country (like many European nations), you might be better off using the Foreign Tax Credit (Form 1116). This allows you to claim a credit against your US tax bill for income taxes paid to a foreign government.
* *Strategy Note*: If you claim the FTC, you often build up "carryover" credits if the foreign tax rate is higher than the US rate. These can be used in future years to offset US taxes on foreign income. Furthermore, utilizing the FTC allows you to contribute to a US IRA, whereas excluding all your income via FEIE might render you ineligible due to having no "taxable compensation."
Financial Reporting: FBAR and FATCA
Beyond income tax, the US closely monitors foreign financial assets to prevent money laundering and tax evasion.
* FBAR (FinCEN Form 114)**: If the *aggregate* value of all your foreign financial accounts (bank accounts, biokerage, mutual funds, some life insurance) exceeds $10,000 at **any point during the calendar year, you must file an FBAR. This is filed separately from your tax return with the Treasury Department. The penalties for non-willful failure to file can be $10,000 per violation. * FATCA (Form 8938): The Foreign Account Tax Compliance Act requires reporting of specified foreign financial assets if their value generally exceeds $50,000 to $600,000 depending on your filing status and whether you live in the US or abroad. This is filed *with* your income tax return.
Social Security and Totalization Agreements
If you work for a foreign employer, you might be liable for both US Social Security/Medicare taxes and the foreign equivalent. The US has "Totalization Agreements" with roughly 30 countries to prevent this double Social Security taxation. These agreements generally determine which system covers you, preserving your benefit eligibility in one country while exempting you from taxes in the other.
Disclaimer: Tax laws are subject to change. Always consult a professional.