Quick overview

U.S. citizens and resident aliens are taxed on worldwide income, no matter where they live. That creates a set of obligations and planning choices for Americans who work, invest, or hold assets overseas. This guide explains the core filing and reporting rules (Forms 1040, FBAR/Form 114, Form 8938), common relief tools (Foreign Earned Income Exclusion and the Foreign Tax Credit), the practical role of tax treaties, and compliance steps I recommend from years of advising expat clients.

(Authoritative guidance: IRS — International Taxpayers: https://www.irs.gov/individuals/international-taxpayers; FBAR/Form 114: https://www.irs.gov/individuals/international-taxpayers/fbar; About Form 8938: https://www.irs.gov/forms-pubs/about-form-8938.)

Why U.S. expats and investors must pay attention

The United States uses citizenship-based taxation: U.S. citizens and green-card holders must file a U.S. Form 1040 reporting worldwide income, even if they live abroad. That single fact is the root of many surprises — foreign wages, rental income, dividends, and gains all can create U.S. tax and reporting obligations. At the same time, most countries tax residents on income sourced to that country, which creates potential double taxation and a need to use available credits, exclusions, and treaty provisions.

In my practice I’ve seen cases where relatively modest foreign bank balances or investment accounts triggered FBAR requirements and penalties because the owner wasn’t monitoring the aggregate $10,000 threshold. Staying on top of simple dollar thresholds and filing deadlines usually avoids the costly headaches.

Core filing & reporting requirements

  • Form 1040 (U.S. individual income tax return): Required for citizens and resident aliens each tax year, reporting worldwide income. See IRS guidance for international taxpayers (IRS: International Taxpayers).

  • FBAR — FinCEN Form 114 (Report of Foreign Bank and Financial Accounts): Must be filed electronically with the U.S. Treasury if the aggregate value of foreign financial accounts exceeds $10,000 at any time during the calendar year. The FBAR is separate from your federal tax return and has its own filing channel and deadlines (https://www.irs.gov/individuals/international-taxpayers/fbar).

  • Form 8938 (Statement of Specified Foreign Financial Assets): Part of FATCA reporting on your federal return for taxpayers whose foreign asset values exceed thresholds that vary by filing status and whether you live abroad. Thresholds are higher for taxpayers living outside the U.S.; confirm current limits on the IRS Form 8938 page (https://www.irs.gov/forms-pubs/about-form-8938).

  • Other forms: Forms 3520/3520-A for certain foreign trusts and gifts; Form 5471 for U.S. persons with certain interests in foreign corporations; Form 8621 for passive foreign investment companies (PFICs); and additional disclosures for foreign pensions or employer-provided benefits. The exact set depends on your assets and activities.

How double taxation relief works: FEIE, Foreign Tax Credit, and treaty benefits

  • Foreign Earned Income Exclusion (FEIE): Eligible expats who meet the bona fide residence test or the physical presence test may exclude foreign-earned wages or self-employment income up to an amount that is adjusted annually for inflation. FEIE can reduce U.S. taxable income, but it does not eliminate the need to file and it doesn’t apply to passive income such as dividends or rental income. Always check the IRS for the current exclusion amount and rules.

  • Foreign Tax Credit (FTC): The FTC provides a dollar-for-dollar credit against U.S. tax for qualifying foreign income taxes paid or accrued. The credit is generally more flexible than FEIE for investors because it can offset U.S. tax on passive income and capital gains. Careful categorization (sourcing rules and separate limitation baskets) matters because the credit is computed separately for different income categories.

  • Tax treaties: Bilateral income tax treaties can change withholding rules, define residency tiebreakers, exempt certain income types, or reduce rates on interest, dividends, and pensions. Treaties do not replace U.S. filing obligations but often provide relief from double taxation or reduce foreign withholding. Review the specific treaty text and IRS guidance for applicability. See our detailed explainer: how tax treaties affect U.S. taxation of foreign income (internal resource: How Tax Treaties Affect U.S. Taxation of Foreign Income).

Interlink: For practical FBAR guidance and common filing errors, see Reporting Foreign Bank Accounts and FBAR Basics (https://finhelp.io/glossary/reporting-foreign-bank-accounts-and-fbar-basics/).

Common scenarios and examples (practical context)

  • Remote employee in Germany paid by a U.S. company: The employee must file Form 1040 and may be eligible for FEIE if they meet the tests, but they also must file FBAR if foreign accounts exceed $10,000. Social security and payroll withholding rules can raise additional issues.

  • U.S. investor with Canadian rental properties: Rental income is taxable in Canada and the U.S. The foreign tax credit can reduce or eliminate double U.S. tax; certain treaty provisions may affect reporting or withholding. I helped a client recharacterize income timing and maximize foreign tax credits to avoid paying tax twice on the same rental receipts.

  • Owner of foreign brokerage accounts or crypto exchanges: You may trigger Form 8938 and FBAR reporting, and gains may be taxed in the U.S. If your foreign brokerage pays foreign taxes (or withholding), those taxes may be creditable.

Practical compliance checklist (step-by-step)

  1. Inventory assets and income types: list foreign bank accounts, brokerage accounts, pensions, trusts, business interests, and rental properties.
  2. Check thresholds: FBAR $10,000 aggregate; Form 8938 thresholds vary (verify current amounts). Determine whether any other international forms (5471, 3520, 8621) apply.
  3. Determine residency test: bona fide residence vs. physical presence to see if FEIE is an option.
  4. Decide FEIE vs. FTC strategy: wages often fit FEIE; investment income usually handled with FTC. Sometimes a combination of both is optimal year-to-year.
  5. File timely returns and separate reports: FBAR due April 15 with automatic extension to October 15? Note: FBAR deadline is April 15 with an automatic extension to October 15 for filings that miss April 15 — verify the current schedule on the Treasury/FinCEN site.
  6. Keep clear records: bank statements, foreign tax returns, employer documents, residency proofs (lease, utility bills) and travel logs.
  7. Consider voluntary disclosure if you have unfiled foreign account reports — the IRS and Treasury have programs for noncompliance resolution, but options and outcomes vary.

Frequent mistakes and how to avoid them

  • Thinking “I don’t owe U.S. tax, so I don’t need to file.” Wrong: filing obligations (including FBAR) can exist even if no tax is due and failure to file can cause penalties.
  • Confusing FBAR and Form 8938: they overlap but have different thresholds, filing locations, and reporting rules. See our comparison FBAR vs. Form 8938 for details (https://finhelp.io/glossary/fbar-vs-form-8938-what-to-file-for-foreign-financial-accounts/).
  • Treating tax treaties as automatic exemptions: treaties require specific conditions and claims on returns. Don’t assume treaty relief applies without reading the treaty and following claim procedures.
  • Neglecting state tax residency: living abroad doesn’t always sever state tax obligations; states like California and New York have specific residency rules.

Planning strategies and professional tips

  • Use the FEIE when your income is mostly earned wages and you meet the residency tests. However, FEIE does not exclude self-employment taxes; plan for Social Security and Medicare obligations.

  • For investment-heavy taxpayers, the Foreign Tax Credit is usually more advantageous than the FEIE because it covers foreign withholding and income taxes on dividends, interest, and gains.

  • Bunch or time taxable events where possible: shifting income or realizing gains in low-tax years can improve the value of foreign tax credits.

  • Coordinate employer withholding and local payroll: if you’re required to pay host-country social taxes, document payments carefully to support credit claims.

  • Work with a CPA or tax attorney experienced in international tax. In my experience, a small upfront fee for specialized advice often avoids larger compliance costs and penalties later.

When to seek professional help immediately

  • You have unfiled FBARs or Forms 8938 and omitted foreign income in prior years.
  • You hold interests in foreign corporations, partnerships, or trusts (Forms 5471, 8865, 3520 may apply).
  • You are a dual-resident (U.S. and another country) with treaty tiebreaker issues.
  • You own PFIC interests (complex and often costly if mishandled).

If any of the above apply, consult a qualified international tax practitioner. Voluntary disclosure programs and IRS penalties can be nuanced; professional help speeds the right resolution.

Professional disclaimer

This article is educational and reflects general principles current as of 2025. It does not replace personalized tax advice. Tax laws and IRS thresholds change — always confirm current rules with the IRS or a qualified tax professional before acting.

If you’d like, I can adapt this guidance to a specific scenario (e.g., Canadian landlord, remote employee in Europe, or U.S. investor in offshore funds) and list the exact forms and planning steps you’re likely to need.