Why this matters

U.S. citizens and resident aliens are taxed on worldwide income no matter where they live, which makes tax planning essential when you move or work abroad. Misunderstanding residency tests, exclusions, credits, or foreign-account reporting can lead to surprising tax bills, penalties, or missed opportunities to reduce double taxation (IRS: Foreign Earned Income Exclusion; IRS: Foreign Tax Credit).

Below I lay out the practical rules, common pitfalls, decision points, and a step-by-step checklist I use in client work to keep expats compliant and minimize taxes where legally possible.

Residency: which U.S. taxpayer rules apply to you?

Residency for U.S. tax purposes determines which rules and filing obligations apply. The two primary concepts are:

  • Citizenship/Green-card status: U.S. citizens and green-card holders are taxed on worldwide income regardless of residence.
  • Tax-resident tests: Noncitizen taxpayers may qualify as U.S. residents under the Substantial Presence Test (SPT) or remain nonresident aliens.

Key tests and definitions:

  • Substantial Presence Test (SPT): Count the days you were physically present in the U.S. using the 3-year weighted formula (current year days + 1/3 of prior year + 1/6 of second prior year). If the total is 183 days or more, you are generally treated as a U.S. tax resident for that year (IRS: Substantial Presence Test).

  • Bona Fide Residence Test: This test applies to U.S. citizens or residents seeking the Foreign Earned Income Exclusion and requires establishing a bona fide residence in a foreign country for an uninterrupted period that includes an entire tax year. Criteria are factual and depend on intent, ties to the foreign country, and the nature of the foreign stay.

  • Physical Presence Test: An alternative to the bona fide residence test for FEIE — you must be physically present in a foreign country for at least 330 full days in any 12‑month period.

Practical note from my practice: always map your entry/exit dates for each calendar year and any consecutive 12‑month periods. Small travel mistakes (e.g., short U.S. trips) can change eligibility for FEIE or determine residency under the SPT.

Key tools to reduce double taxation

  1. Foreign Earned Income Exclusion (FEIE) — Form 2555
  • Allows qualifying expats to exclude foreign earned income up to the annually adjusted limit and possibly claim a foreign housing exclusion or deduction. The FEIE is claimed on Form 2555 (IRS: Foreign Earned Income Exclusion).
  • Two routes: bona fide residence test or physical presence test. Choose the test that matches your facts.
  • Important: FEIE excludes earned income for income tax but generally does not exempt you from U.S. self-employment tax unless a totalization agreement applies.
  1. Foreign Tax Credit (FTC) — Form 1116
  • If you paid income taxes to a foreign country, you can generally claim a dollar-for-dollar nonrefundable credit against U.S. tax on the same income (IRS: Foreign Tax Credit).
  • Useful when foreign tax rates exceed U.S. rates or when income is not eligible for FEIE. FTC rules include limitations, sourcing rules, and the ability to carry back one year and carry forward up to ten years.

Choosing FEIE vs. FTC:

  • FEIE reduces taxable earned income directly, which may be best if most income is wages from foreign employer and foreign tax rates are low.
  • FTC prevents double tax on income taxed heavily abroad and can be more valuable when you have investment income or high foreign rates.
  • In practice, I run both scenarios for clients and compare the final U.S. tax after factoring in state tax exposure (if you have state ties), self-employment taxes, and how FEIE affects foreign tax credit computations.

Foreign-account reporting: FBAR and FATCA (Form 8938)

Two separate reporting regimes often confuse taxpayers:

  • FBAR (FinCEN Form 114): Must be filed electronically with the Financial Crimes Enforcement Network if the aggregate value of foreign financial accounts exceeds $10,000 at any time during the year. FBAR is separate from your tax return and has its own deadlines and penalties (FinCEN; see our guide: Reporting Foreign Bank Accounts and FBAR Basics).

  • FATCA (Form 8938): Part of your tax return; requires reporting specified foreign financial assets when you meet filing thresholds that vary by filing status and whether you live abroad. Thresholds are higher for taxpayers living outside the U.S.

Tip: FBAR and Form 8938 have different scopes and thresholds. You may need to file both. See our comparison: FBAR vs. Form 8938 for details.

Penalties for non‑filing can be severe — civil penalties for willful FBAR violations can be especially high, and Form 8938 failures also carry penalties (our FBAR penalties guide outlines real cases and consequences).

Filing deadlines and extensions

  • Regular deadline: April 15 (subject to the usual calendar changes).
  • Automatic extension for expats: You receive an automatic two‑month extension to file until June 15 if you are living and filing from abroad, but taxes owed are still subject to interest from the April deadline. You can request a further extension to October 15 by filing Form 4868 (IRS: U.S. Citizens and Resident Aliens Abroad — Extensions).

Action point: If you owe tax, estimate and pay by April 15 (or risk interest), then use extensions solely for filing the return if needed.

Common mistakes I see and how to avoid them

  • Assuming living abroad removes U.S. filing obligations. U.S. citizens and green card holders must file returns when income meets filing thresholds.
  • Overlooking FBAR/8938 reporting. These separate filings are often missed and can trigger penalties.
  • Using FEIE without evaluating self‑employment tax or state tax consequences. FEIE doesn’t eliminate self‑employment tax and may not remove state filing requirements if you retain state residency.
  • Ignoring tax treaties and totalization agreements that can affect social security obligations and residency claims.

Practical checklist before tax season

  1. Reconcile travel history: compile passport stamps, airline records, and travel dates.
  2. Identify foreign-earned income vs. U.S.-source income.
  3. Calculate FEIE eligibility under the bona fide or physical presence test (Form 2555) and compare to claiming the FTC (Form 1116).
  4. Check foreign tax paid and document local tax filings for FTC support.
  5. Aggregate foreign account balances and determine FBAR (FinCEN Form 114) and Form 8938 obligations.
  6. Confirm filing deadlines and remit estimated payments by April 15 if you expect to owe.
  7. Consult a cross-border tax professional if you have trusts, ownership in foreign corporations, or complex investments.

Real-world scenarios (brief)

  • Employee on assignment in Germany: Claimed FEIE via bona fide residence test and the housing exclusion. Also analyzed German taxes and treaty provisions to avoid double taxation.
  • Self-employed consultant traveling across Europe: FEIE reduced income subject to U.S. tax, but U.S. self-employment tax still applied. We evaluated whether a totalization agreement existed for social security.
  • U.S. investor living in Canada with U.S. investments: FTC was more beneficial because much of the income was passive or U.S.-source, and credits offset U.S. tax liability.

When to get professional help

If you have any of the following, consult a credentialed international tax professional: ownership or control of a foreign corporation or trust, significant passive income, complex employer benefits, or potential residency claims in more than one country. These issues can create reporting obligations beyond FEIE/FTC and FBAR — for example, Form 5471 (foreign corporations) or Form 3520/3520-A (foreign trusts).

Recommended internal resources

Final takeaways

Tax planning for expats is about matching facts to the right rules: residency tests, the FEIE or FTC, and separate account-reporting obligations. Document travel carefully, keep clear records of foreign taxes paid, and choose the strategy that minimizes net tax while keeping you compliant. When in doubt, bring the full facts to a cross-border tax specialist; mistakes can be costly but are often fixable with timely professional help.

Disclaimer: This article is educational and not personalized tax advice. Rules change and amounts (for example FEIE limits) are indexed annually — check the IRS pages linked above or consult a qualified tax advisor for advice specific to your situation.

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