Expats Still Must Pay U.S. Taxes

Use these links to jump to different sections:

• Paying U.S. Income Tax Returns
• Taxes on Unearned or Passive Income
• Operating Your Own Business Abroad
• Filing Deadlines for Expats
• IRS Penalties for Failure to File Taxes
• Find Experienced Legal Help

If you’re working in another country as a U.S. citizen or green card holder, you may think you’re off the hook when it comes to filing and paying taxes to the U.S. government. That’s not the case. There are a number of specific rules that apply to U.S. taxpayers living in other countries.

Your tax liabilities will likely be relatively straightforward if you’re working for a U.S.-based employer while living in a foreign country. If, however, you’re self-employed while living abroad—or working for a foreign employer—things can get a little complicated.

Paying U.S. Income Tax Returns

How your income is taxed by the Internal Revenue Service (IRS) depends, in part, on your income source. Special exemptions and credits may also apply to expats based on how much foreign income they earn.

Foreign Income Taxes

Whether working for an American company or a foreign employer, the money you earn while living abroad is considered “foreign earned income,” qualifying you for the Foreign Earned Income Exclusion (FEIE).

The FEIE rule allows you to exclude up to a designated amount from your U.S. tax liability. The amount is adjusted for inflation each year; for tax year 2023, it was $120,000. You will only owe U.S. taxes on any earned income above that amount, which you then pay based on the tax rate applicable to your total income.

Business Revenue

Whether your income from a business is considered foreign or not depends on where its business occurs. A service business is based on where you perform the service. A product business is based on where products are sold—or, if the business produces products, where they are produced.

Foreign Tax Credit

If you paid income tax on your income in the country where you live and work, the Foreign Tax Credit prevents you from being taxed by the U.S. on the same income.

Taxes on Unearned or Passive Income

Other sources of money, such as investment income, pension or retirement payments, dividends, or rental income, may be subject to taxation and filing requirements but may not be eligible for FEIE.

Under the Foreign Account Tax Compliance Act (FATCA), specified individuals—including U.S. citizens and resident and non-resident aliens—must use IRS form 8938 to report financial assets outside of the United States if the aggregate value is $50,000 or more (the threshold is higher in some cases). In addition to FATCA reporting requirements, any foreign financial accounts over $10,000 must be reported to the Financial Crimes Enforcement Network (FinCEN), a bureau under the U.S. Department of Treasury, through a Foreign Bank Account Report (FBAR; also called FinCEN Form 114).

Be aware that money invested in a tax-deferred retirement plan by an employer in another country may not actually be tax-deferred for U.S. purposes. This can get tricky—not to mention costly. Be sure to consult with a qualified tax expert who understands these rules.

Operating Your Own Business Abroad

Record-keeping is essential but not always straightforward if you’re self-employed or operating your own business abroad. Some countries have practices that don’t rely on written records or systems that don’t easily track with common record-keeping programs.

In some circumstances, you may be eligible for a Foreign Housing Exclusion to exclude your housing expenses from your taxable income.

Filing Deadlines for Expats

Note that you get an automatic two-month return deadline extension to June 15 for filing as an expat. If you’re in a country that doesn’t follow a calendar year for tax purposes, be sure to request a six-month extension to October 15. And don’t forget about your state tax return. In all but nine states, the state wherein you last resided is still considered your home and requires you to file a return.

IRS Penalties for Failure to File Taxes

Don’t skip out on filing your U.S. tax return just because you aren’t living here. The IRS has a number of penalties at its disposal, including hefty fines and the ability to cancel your passport should you decide filing is optional. That being said, there is an inclination to grant amnesty for ‘non-wilfully delinquent’ expats who choose to come out of hiding.

Find Experienced Legal Help

Filing taxes is never easy, and filing as an expatriate can be considerably more complicated. Talk to an experienced tax professional or tax attorney familiar with the expat tax rules applicable to your situation. For more information on this legal area, see our tax law overview.