International Tax Basics for U.S. Expats and Cross-Border Investors

Overview

U.S. tax law is unusual: the United States taxes its citizens and resident aliens on worldwide income, even when they live and earn abroad. That means U.S. expats and many cross-border investors must file U.S. federal tax returns and meet multiple reporting requirements in addition to any obligations to their host country. This article summarizes the core obligations, common reliefs (like the Foreign Earned Income Exclusion and the Foreign Tax Credit), important reporting forms, and practical steps to reduce compliance risk.

Key obligations and why they matter

• File an annual Form 1040 if you meet the filing threshold for your filing status and age, even if all income is earned overseas (IRS: Tax Information for U.S. Citizens and Resident Aliens Abroad).
• Report certain foreign financial assets and accounts through FATCA (Form 8938) and the FBAR (FinCEN Form 114); these are separate requirements with different thresholds and penalties.
• Claim available reliefs — Foreign Earned Income Exclusion (FEIE) or Foreign Tax Credit (FTC) — but document residency, physical presence, and taxes paid to foreign jurisdictions.
• Consider how tax treaties, foreign social taxes, and state tax residency rules affect liabilities.

These obligations matter because failures to file or to report foreign assets can trigger severe civil penalties and, in egregious cases, criminal exposure. The FBAR threshold is low: if the aggregate value of your foreign financial accounts exceeds $10,000 at any point in the calendar year, you must file FinCEN Form 114 electronically (FinCEN guidance).

Forms you will commonly encounter

• Form 1040 (U.S. individual income tax return) — regular federal filing.
• Form 2555 (Foreign Earned Income) — to claim the FEIE and the foreign housing exclusion/deduction. The FEIE limit is adjusted annually; check the IRS Form 2555 page for current figures (IRS: About Form 2555).
• Form 1116 (Foreign Tax Credit) — to take credit for foreign income taxes paid and help prevent double taxation.
• Form 8938 (Statement of Specified Foreign Financial Assets) — a FATCA reporting requirement; thresholds vary by filing status and whether you live abroad (IRS: Form 8938).
• FinCEN Form 114 (FBAR) — required if aggregate foreign accounts exceed $10,000; file electronically via FinCEN’s BSA E-Filing System (FinCEN: Report of Foreign Bank and Financial Accounts).

Note: FBAR (FinCEN Form 114) and Form 8938 are separate. You may need to file both depending on your accounts and asset types. For an in-depth comparison and filing guidance, see our FinHelp article on FBAR vs. Form 8938: “FBAR vs. Form 8938: What to File for Foreign Financial Accounts.” (Internal link: https://finhelp.io/glossary/fbar-vs-form-8938-what-to-file-for-foreign-financial-accounts/).

Reliefs that reduce U.S. tax on foreign income

• Foreign Earned Income Exclusion (FEIE): If you qualify under the bona fide residence test or the physical presence test, you may exclude foreign earned income up to an amount that the IRS indexes annually. Also consider the foreign housing exclusion or deduction for certain housing costs. See IRS Form 2555 for current limits and eligibility details.
• Foreign Tax Credit (FTC): Use Form 1116 to claim a credit for foreign income taxes paid, dollar-for-dollar against U.S. tax on the same income. FTCs are often preferable when you have passive income or foreign taxes that exceed the FEIE benefit.

In practice, clients with wage income often use FEIE to exclude earned income and then use the FTC for other types of income or for taxes on excluded income where relevant. In my experience advising expats, combining FEIE and FTC requires careful recordkeeping and sequence planning to avoid wasted credits.

Residency tests: who qualifies for FEIE?

Two main tests are used for FEIE eligibility:

• Bona fide residence test: establishes residency in a foreign country for an uninterrupted period that includes an entire tax year; facts and circumstances matter.
• Physical presence test: requires 330 full days physically present in a foreign country during any consecutive 12-month period.

Residency and presence rules also affect state tax obligations. Many U.S. states use domicile and statutory residency rules to determine state taxability — maintaining strong ties to a state can keep you subject to state income tax even while living abroad.

Tax treaties and double taxation

The U.S. has income tax treaties with many countries that can alter withholding, residency determinations, and other tax treatment. Treaties typically provide tiebreaker rules for dual residents and can reduce or eliminate certain types of U.S. tax. Always read the specific treaty articles relevant to your situation and consult the IRS treaty tables or your tax advisor (IRS: U.S. Income Tax Treaties).

Reporting foreign investments, trusts, and businesses

• Passive foreign investments (dividends, interest, capital gains) and foreign retirement accounts may require reporting and generate U.S. tax.
• Controlled foreign corporations (CFCs), passive foreign investment companies (PFICs), and foreign trusts have specialized U.S. reporting rules (Forms 5471, 8621, 3520/3520-A). These rules can create current U.S. tax on otherwise deferred or distributed foreign income.
• If you run a business abroad, consider how self-employment tax, pension plans, and host-country tax credits interact with U.S. rules.

When a client neglected to report PFIC holdings, the late discovery created a complex remedial filing that increased compliance costs; earlier planning and annual review could have minimized surprises.

Deadlines and extensions

• Regular due date for Form 1040: generally April 15. U.S. citizens living abroad receive an automatic two-month extension to June 15 to file, but interest on any tax due accrues from April 15; you can request an additional extension to October 15 by filing Form 4868.
• FBAR is due April 15 with an automatic extension to October 15 (FinCEN deadlines). Confirm current dates on IRS/FinCEN pages as rules occasionally adjust.

Common mistakes and traps to avoid

• Assuming you don’t need to file because you live abroad — many expats still meet filing thresholds and reporting rules.
• Mixing up FBAR and FATCA: their thresholds, covered assets, and filing systems differ. See our guide “Form 114 — Report of Foreign Bank and Financial Accounts (FBAR)” for practical filing tips (Internal link: https://finhelp.io/glossary/form-114-report-of-foreign-bank-and-financial-accounts-fbar-2/).
• Poor recordkeeping: lacking documentation of foreign income, taxes paid, or days abroad weakens FEIE/FTC claims.
• Ignoring state residency: you can be U.S. federal tax-compliant yet still owe state tax if you haven’t properly severed domicile.
• Underreporting ownership of foreign corporations or trusts — specialized rules carry steep penalties.

Practical compliance checklist

1. Determine your filing requirement for Form 1040.
2. Track days outside the U.S. to support bona fide residence or physical presence tests.
3. Aggregate and value your foreign financial accounts to test FBAR and FATCA thresholds.
4. Gather foreign tax payment records for Form 1116.
5. Review host-country treaty provisions and social tax agreements.
6. File required informational returns (Forms 8938, 5471, 8621, 3520, etc.) if applicable.
7. If you missed prior filings, consider voluntary disclosure or the Streamlined Filing Compliance Procedures — consult a specialist (see our article on Streamlined Foreign Offshore Procedures).

Real-world scenarios (brief)

• Salary in London: An engineer living in the UK used the FEIE to exclude most earned wages and claimed the foreign housing exclusion for high London rent; they still filed Form 1116 for taxable investment income.
• Remote contractor in multiple countries: A digital nomad with short stays in several countries struggled to meet the 330-day physical presence test and instead relied on FTCs and careful allocation of income.
• Dual citizen in Canada: A couple coordinated Canadian tax filings with U.S. returns, used the FTC to offset most U.S. tax, and reviewed treaty tie-breaker provisions to confirm residency.

When to hire a professional

If you have any of the following, hire a U.S. international tax specialist or CPA experienced with expat returns:

• Aggregate foreign accounts over $10,000 (FBAR exposure).
• Ownership in foreign corporations, trusts, or passive funds (PFIC/CFC rules).
• Complex residency facts or multi-country income streams.
• Prior-year noncompliance or missing FBAR/FATCA filings.

In my practice, early engagement (before moving or starting foreign work) often reduces tax friction, avoids late filings, and creates better long-term outcomes.

Helpful resources

• IRS — Tax Information for U.S. Citizens and Resident Aliens Abroad: https://www.irs.gov/individuals/international-taxpayers
• IRS — About Form 2555 (FEIE): https://www.irs.gov/forms-pubs/about-form-2555
• FinCEN — Report of Foreign Bank and Financial Accounts (FBAR): https://www.fincen.gov/report-foreign-bank-and-financial-accounts
• FinHelp: FBAR vs. Form 8938: What to File for Foreign Financial Accounts: https://finhelp.io/glossary/fbar-vs-form-8938-what-to-file-for-foreign-financial-accounts/
• FinHelp: Form 114 — Report of Foreign Bank and Financial Accounts (FBAR): https://finhelp.io/glossary/form-114-report-of-foreign-bank-and-financial-accounts-fbar-2/
• FinHelp: How Tax Treaties Affect Expatriate Tax Obligations: https://finhelp.io/glossary/how-tax-treaties-affect-expatriate-tax-obligations/

Bottom line

U.S. expats and cross-border investors face a layered set of obligations: federal income tax on worldwide income, FBAR and FATCA reporting, and specialized disclosures for foreign entities. While reliefs like the FEIE and FTC often reduce double taxation, the recordkeeping and reporting complexity are real. Start early, document thoroughly, and consult a qualified international tax advisor to align your U.S. and foreign filings.

Disclaimer: This article provides general information and is not tax advice. For advice tailored to your situation, consult a licensed CPA or international tax attorney. Relevant IRS and FinCEN pages are cited for reference; always verify current dollar limits and deadlines on official sites.