Overview

U.S. citizens and resident aliens living or working abroad face a layered tax landscape: U.S. federal tax rules (citizenship-based taxation), host-country tax systems, foreign-account reporting rules, and the interaction of tax treaties and credits. Navigating these issues correctly reduces the risk of double taxation, costly penalties, and surprises during major financial events (home sale, retirement, or business sale).

In my practice as a CPA advising expats, the recurring areas that create the biggest compliance gaps are: 1) correctly choosing between the Foreign Earned Income Exclusion (FEIE) and the foreign tax credit, 2) meeting FATCA/Form 8938 and FBAR/FinCEN reporting requirements, and 3) understanding how tax treaties or special rules (like Subpart F or GILTI for controlled foreign corporations) may affect corporate and passive income.

(Authoritative: IRS Publication 54 and the IRS international pages explain filing and exclusions; FinCEN and the Treasury publish FATCA/FBAR guidance.)

Sources: IRS — Taxation of U.S. Citizens and Resident Aliens Abroad (Pub. 54), FinCEN — FBAR guidance, U.S. Treasury — FATCA information.

Core issues and what they mean for you

  • Foreign Earned Income Exclusion (FEIE): U.S. expats can exclude qualifying foreign earned income up to an annual limit (the limit is adjusted yearly; for historical context it was $120,000 in 2023). To claim it you file Form 2555 and meet either the bona fide residence test or the physical presence test. See How to Qualify for the Foreign Earned Income Exclusion for step-by-step guidance: https://finhelp.io/glossary/how-to-qualify-for-the-foreign-earned-income-exclusion/ (IRS Form 2555 details: https://finhelp.io/glossary/form-2555-foreign-earned-income/). (See IRS Pub. 54.)

  • Foreign Tax Credit (FTC): If you pay income tax to a foreign country, you can usually take a dollar-for-dollar credit on your U.S. tax return for those foreign taxes to avoid double taxation. Deciding between FEIE and the FTC (or combining them) depends on your income type, deductions, and long-term tax consequences (e.g., credits preserve U.S. tax credits for later use; exclusions do not).

  • FATCA and Form 8938: The Foreign Account Tax Compliance Act requires disclosure of specified foreign financial assets on Form 8938 when they exceed filing thresholds. FATCA’s aim is transparency; failure to file can trigger penalties and increased IRS scrutiny (U.S. Treasury FATCA resources explain the law).

  • FBAR (FinCEN Form 114): If the aggregate value of your foreign financial accounts exceeds $10,000 at any time during the year, you must file an FBAR electronically with FinCEN. FBAR penalties for non-willful and willful violations can be severe. (See FinCEN FBAR instructions.)

  • Tax Treaties: Bilateral tax treaties can change which country has primary taxing rights, reduce or eliminate withholding, and provide tie-breaker rules for residency. Always check the treaty text when you earn foreign-source income — see How Tax Treaties Affect U.S. Taxation of Foreign Income: https://finhelp.io/glossary/how-tax-treaties-affect-u-s-taxation-of-foreign-income/.

  • Business and investment rules (CFCs, Subpart F, GILTI): U.S. shareholders of certain foreign corporations may face immediate U.S. tax on certain earnings (Subpart F) or on Global Intangible Low-Taxed Income (GILTI). These rules can create current U.S. tax even when profits remain offshore.

Filing mechanics, deadlines, and common traps

  • Filing deadlines and automatic extensions: Expats get an automatic 2-month extension to file (normally to June 15) but taxes owed are due by the regular April due date to avoid interest; you can request an additional extension to October 15 with Form 4868. (IRS guidance explains the foreign address extension.)

  • Common reporting mistakes:

  • Not filing an FBAR when the $10,000 aggregate threshold is met.

  • Misusing the FEIE when part of income is U.S.-sourced or when housing exclusions require separate calculations.

  • Forgetting to report foreign pensions, rental income, or brokerage accounts on Form 8938.

  • Overlooking the need to file state returns — some states still want returns from residents even when living abroad.

Practical planning tips (actionable)

  1. Start with a facts inventory: residency, dates abroad, income types and sources, foreign taxes paid, foreign accounts (balances and institutions), and business ownership.
  2. Decide early whether to claim the FEIE or the FTC for each tax year — run “what-if” scenarios to compare outcomes, because the choice affects future credits, AMT exposure, and Social Security taxation.
  3. Document the tests: keep travel logs, employment contracts, lease documents, and tax payment receipts. These support FEIE and treaty claims during audits.
  4. Meet foreign-account deadlines: track your top-of-day account balances to determine FBAR filing obligations and use bank statements to substantiate amounts.
  5. Review retirement planning implications: many foreign pension plans don’t map neatly to U.S. tax rules; taxable events can occur on contributions, accrual, or distribution.
  6. If you missed prior-year filings, consider the IRS’s Streamlined Filing Compliance Procedures or consult a specialist; in my experience, proactive correction often reduces penalty exposure (see IRS Streamlined procedures guidance).

Example scenarios (based on client work)

  • The remote worker: An employee of a U.S. company moved to Spain and continued being paid in the U.S. We compared claiming the FEIE versus taking foreign tax credits (Spain’s progressive tax plus social security). Because their foreign taxes were high relative to the exclusion, the FTC reduced U.S. tax better than the FEIE.

  • The entrepreneur: A U.S. founder set up a foreign corporation. Early on, she didn’t realize Subpart F and GILTI might tax retained earnings. We restructured ownership and timing of distributions to better align with U.S. tax timing rules and used foreign tax credits to offset some of the U.S. exposure.

Checklist before filing

  • Have you listed all foreign income (salary, rents, pensions, investment gains)?
  • Did you evaluate FEIE vs. FTC for each income source?
  • Have you prepared and attached Form 2555 or Form 1116 where appropriate?
  • Do you meet Form 8938 or FBAR filing thresholds?
  • Have you checked whether a U.S. state return is required?

Penalties and enforcement

Penalties range from fixed-dollar fines for missed informational returns to percentage-based penalties and, in willful cases, criminal exposure. The IRS has aggressively increased international information exchange and enforcement since FATCA’s enactment; voluntary correction programs can substantially reduce exposure compared with waiting for an audit.

FAQs (concise answers)

  • Do I have to file U.S. taxes if I live abroad? Yes — U.S. citizens and resident aliens must file a return reporting worldwide income, though exclusions/credits may reduce or eliminate tax owed (IRS Pub. 54).
  • What’s the difference between FBAR and Form 8938? FBAR (FinCEN Form 114) is filed with FinCEN to report foreign accounts exceeding $10,000 aggregate; Form 8938 is an IRS form for specified foreign financial assets and uses different thresholds.
  • Can I use both FEIE and FTC? Yes — you can exclude qualifying earned income with FEIE and use FTC for other foreign taxes, but planning is required to avoid losing credit value.

Where to get authoritative help

Further reading on FinHelp: How to Qualify for the Foreign Earned Income Exclusion (step-by-step) — https://finhelp.io/glossary/how-to-qualify-for-the-foreign-earned-income-exclusion/; Form 2555 — Foreign Earned Income (filer guidance) — https://finhelp.io/glossary/form-2555-foreign-earned-income/; How Tax Treaties Affect U.S. Taxation of Foreign Income — https://finhelp.io/glossary/how-tax-treaties-affect-u-s-taxation-of-foreign-income/.

Professional disclaimer

This article is educational and does not constitute individualized tax advice. Tax laws change and thresholds differ by year and circumstance; consult a qualified tax professional for recommendations tailored to your facts and for current-year limits and filing requirements.

Author: CPA and financial educator with 15+ years advising U.S. expats on tax compliance and cross-border planning.