Table of Contents
Moving abroad as an American is exciting. New country, new opportunities, new life. Then April arrives, and reality hits you like a brick wall.
While most expats may think that they are tax exempt, you still owe U.S. taxes, no matter where you live. Doesn't matter if you haven't been back to America in five years. Doesn't matter if you're paying taxes in your new country. IRS wants its cut of your worldwide income.
The United States is one of only two countries in the world that taxes based on citizenship, not where you live. This means filing tax returns every single year, even if you haven't earned a penny on American soil.
But here's where most expats get it wrong: they think this means paying double taxes forever. The IRS gives you powerful tools to reduce or eliminate your tax burden. Foreign Earned Income Exclusion can help you save up to $130,000 in 2025. Foreign Tax Credit lets you offset taxes paid abroad. Tax treaties provide additional protection.
The problem? Most expats don't know these tools exist. Or they mess up the requirements and lose the benefits. Miss a deadline, file the wrong form, forget a reporting requirement, and you're looking at penalties that wipe out years of savings.
This guide shows you exactly how to handle American expat taxes in 2025. No confusing jargon. No complicated legal speak. Just practical steps that keep you compliant and minimize your tax bill.
Understanding Your Tax Obligations as an American Expat
Being American creates worldwide tax obligations that follow you everywhere. No escape routes. No exceptions. U.S. citizens and green card holders must file tax returns regardless of where they live or work. This system is called citizenship-based taxation, and it applies to you if you hold:
- U.S. citizenship (even if you were born abroad)
- Green card status (permanent resident)
- Substantial U.S. ties (even as a non-citizen)
2025 Filing Thresholds
You must file a tax return if your income exceeds these amounts:
- Single: $15,000
- Married Filing Jointly: $30,000
- Married Filing Separately: $5
- Head of Household: $22,500
- Self-Employed: $400 (regardless of filing status)
Married to a non-American? You'll probably file "Married Filing Separately" to keep your spouse's information away from the IRS. That means you must file if you earned more than $5. Five dollars.
What Income Must Be Reported
All worldwide income gets reported to the IRS:
- Foreign employer wages and salary
- Self-employment income from anywhere
- Investment returns from foreign accounts
- Rental property income worldwide
- Pension and retirement payments
- Bank interest from foreign accounts
- Capital gains from asset sales anywhere
Reporting Requirements Beyond Tax Returns
Your obligations don't stop at Form 1040. Additional forms may be required:
- FBAR (Foreign Bank Account Report) for accounts over $10,000
- Form 8938 (FATCA) for foreign assets over threshold amounts
- Form 8621 for foreign mutual funds or certain insurance policies
- Form 5471 for foreign corporation ownership
- Form 3520 for foreign trust involvement
Miss these forms, and the penalties are brutal. FBAR violations can cost up to $12,921 per account per year. FATCA penalties reach $60,000 annually.
State Tax Complications
Federal taxes aren't your only concern. Some states never let you go:
- "Sticky states" like California and New York make non-residency difficult
- You might owe state taxes on worldwide income until you properly sever ties
- State-sourced income (rentals, business income) may be taxed regardless of residency
- Some states tax former residents on income for years after moving
Key Tax Protections You Get as an Expat
The IRS recognizes that double taxation is unfair. Several powerful tools can reduce or eliminate your U.S. tax burden when living abroad.
Foreign Earned Income Exclusion (FEIE)
This is the big one. For 2025, you can exclude up to $130,000 of foreign earned income from U.S. taxes. If you're married and both spouses work abroad, that's up to $260,000 combined exclusion.
To qualify for FEIE, you must:
- Have your tax home in a foreign country
- Pass either the Physical Presence Test OR the Bona Fide Residence Test
- Have foreign-earned income (wages, salary, self-employment)
Physical Presence Test
Be physically present in foreign countries for at least 330 full days during any 12-month period. This test is strict:
- Must be 330 full days (not partial days)
- Any day you're in the U.S. counts against you
- Travel days between countries don't count as U.S. days
- You can choose any 12-month period that works best
Bona Fide Residence Test
Establish genuine residence in a foreign country for an uninterrupted period that includes an entire tax year. Factors include:
- Intention to remain in the foreign country indefinitely
- Established home and family in the foreign country
- Minimal ties to the United States
- Foreign country treats you as a resident
Foreign Tax Credit
Claim credit for foreign income taxes paid to other countries. This credit:
- Offsets U.S. tax dollar-for-dollar
- Applies to foreign taxes on the same income reported to the IRS
- Can be carried forward up to 10 years if not fully used
- Works best for passive income not covered by FEIE
Foreign Housing Exclusion
If you qualify for FEIE, you can also exclude qualifying housing costs above a base amount. For 2025, this covers:
- Rent payments for foreign housing
- Utilities (except telephone)
- Real estate and personal property taxes
- Homeowner's or renter's insurance
- Furniture rental and repairs
Tax Treaties
The U.S. has tax treaties with over 60 countries that can provide additional benefits:
- Reduced withholding rates on certain income types
- Tie-breaker rules for determining residency
- Specific exemptions for certain professions
- Protection from double taxation on retirement income
How to File Expat Taxes: Step-by-Step Process
Filing expat taxes involves more forms and complexity than domestic returns. Here's exactly what to do.
Step 1: Gather All Income Documentation
Collect records of worldwide income for the tax year:
- Foreign employer wage statements (similar to W-2s)
- Self-employment income records and 1099s
- Foreign bank interest statements
- Investment income from all countries
- Rental property income documentation
- Foreign pension or retirement payments
- Currency conversion records for USD reporting
Step 2: Determine Your Qualification Status
Before filing, establish which tax benefits you qualify for:
- Count days outside the U.S. for Physical Presence Test
- Document foreign residency for Bona Fide Residence Test
- Calculate foreign taxes paid for the Foreign Tax Credit
- Identify your tax home location
Step 3: Choose Your Tax Strategy
Decide which approach minimizes your overall tax burden:
- Foreign Earned Income Exclusion for earned income up to $130,000
- Foreign Tax Credit for foreign taxes paid
- Combination approach (FEIE for earned income, FTC for passive income)
- Tax treaty benefits, if applicable
Step 4: Complete Required Forms
Main forms for most expats include:
- Form 1040: Standard U.S. individual tax return
- Form 2555: Foreign Earned Income Exclusion
- Form 1116: Foreign Tax Credit
- Schedule B: Interest and dividend income (includes foreign account question)
- Form 8938: FATCA reporting (if assets exceed thresholds)
Step 5: File FBAR Separately
If you had over $10,000 combined in foreign accounts at any time during the year:
- File FinCEN Form 114 electronically
- Due date is October 15, 2025 (automatic extension from April 15)
- Filed separately from your tax return through the BSA E-Filing System
- Penalties for not filing can be severe
Step 6: Handle State Tax Obligations
Don't forget about state taxes:
- Determine if your former state still considers you a resident
- File state returns if required based on residency or income sourcing
- Take steps to establish non-residency if beneficial
- Consider domicile changes for "sticky states"
Step 7: Submit Your Returns and Pay Any Taxes Owed
- File electronically or mail paper returns
- Pay any taxes owed by the filing deadline
- Set up installment agreements if you can't pay in full
- Keep copies of all filed returns and supporting documents
Avoid Common Expat Tax Mistakes
Learn from other expats' costly errors. These mistakes can trigger audits, penalties, and years of IRS problems.
Mistake #1: Not Filing Because You Think You Don't Owe
Many expats assume foreign taxes eliminate U.S. filing requirements. Wrong. A filing is required regardless of whether you owe taxes. You must file to claim exclusions and credits that reduce your tax bill.
Mistake #2: Missing the FBAR Deadline
The FBAR is due October 15 and must be filed separately from your tax return. The $10,000 threshold applies to the highest combined balance at any time during the year. Even if your account was only over $10,000 for one day, you must file.
Mistake #3: Miscounting Days for Physical Presence Test
The 330-day requirement is exact. Common errors include:
- Counting partial days as full days
- Not tracking travel days carefully
- Forgetting about brief U.S. trips for family emergencies
- Using the calendar year instead of the optimal 12-month period
Mistake #4: Using FEIE and Foreign Tax Credit on the Same Income
You cannot double-dip. Choose the benefit that provides greater tax savings. Generally, use FEIE for earned income and Foreign Tax Credit for passive income, like investments.
Mistake #5: Ignoring State Tax Obligations
Some states make non-residency very difficult to establish. Common problems:
- Maintaining a driver's license or voter registration
- Keeping property ownership without proper planning
- Using family addresses for banking or official documents
- Not understanding your former state's specific requirements
Mistake #6: Poor Record Keeping
The IRS can audit returns for up to three years (longer in some cases). Maintain detailed records of:
- Income sources and amounts
- Foreign taxes paid with supporting documentation
- Days spent in each country
- Housing costs and related expenses
- Currency conversion rates used
Mistake #7: Not Getting Professional Help for Complex Situations
DIY tax preparation works for simple situations. Get professional help if you have:
- Multiple countries of residence or income
- Foreign business ownership
- Complex investment structures
- Prior year compliance issues
- High asset values requiring additional reporting
How NSKT Global Can Help
NSKT Global specializes in comprehensive tax services for American expats worldwide. We understand the unique challenges of U.S. citizenship-based taxation and provide solutions that keep you compliant while minimizing your tax burden.
Complete Tax Preparation and Planning
We handle all aspects of expat tax filing, from straightforward returns to complex multi-country situations. Our team prepares federal returns, state returns where required, and all necessary international reporting forms. We analyze your situation annually to ensure optimal tax strategies.
FEIE and Foreign Tax Credit Optimization
Our experts determine the best approach for your specific situation. We calculate potential savings from Foreign Earned Income Exclusion versus Foreign Tax Credit, often recommending combinations that maximize benefits. We also help you establish and maintain qualifications for these valuable exclusions.
FBAR and FATCA Compliance
We ensure full compliance with all foreign reporting requirements. This includes FBAR filing for foreign bank accounts, Form 8938 for FATCA compliance, and other specialized forms for foreign assets, trusts, or business interests. Our systematic approach prevents costly compliance failures.
Multi-Country Tax Coordination
Living or working in multiple countries creates complex tax situations. We coordinate requirements across different tax systems, help with treaty benefits, and ensure you're not paying more than legally required to any jurisdiction.
State Tax Resolution and Planning
We help you properly establish non-residency status with your former state and handle ongoing obligations if required. This includes documentation requirements, domicile planning, and representation in state tax matters.
Streamlined Compliance for Non-Filers
If you haven't been filing, we guide you through the IRS Streamlined Filing Compliance Procedures. This program allows eligible expats to catch up on prior year filings without facing penalties, provided the failure to file was non-willful.
Audit Support and IRS Representation
If the IRS selects your return for examination, we provide complete representation. Our team handles all correspondence, prepares responses, and represents you in discussions with IRS agents to achieve favorable outcomes.
Whether you're a new expat figuring out your obligations or a long-term expatriate managing complex international finances, our specialized expertise ensures you stay compliant while paying the minimum amount legally required. We take the confusion out of expat taxes so you can focus on building your life abroad.
Frequently Asked Questions
Q: Do I have to file U.S. taxes if I live abroad and pay taxes in my host country?
Yes, U.S. citizens and green card holders must file U.S. tax returns annually, regardless of where they live or what foreign taxes they pay. However, the Foreign Earned Income Exclusion and Foreign Tax Credit can significantly reduce or eliminate your U.S. tax liability.
Q: How much foreign income can I exclude from U.S. taxes in 2025?
The Foreign Earned Income Exclusion allows you to exclude up to $130,000 of foreign earned income in 2025. If you're married and both spouses qualify, you can exclude up to $260,000 combined. This amount is adjusted annually for inflation.
Q: What's the difference between the Physical Presence Test and Bona Fide Residence Test?
The Physical Presence Test requires being outside the U.S. for at least 330 full days in any 12-month period. The Bona Fide Residence Test requires establishing genuine residence in a foreign country for an uninterrupted period, including a full tax year. You only need to meet one test to qualify for FEIE.
Q: Do I need to report foreign bank accounts even if I don't owe U.S. taxes?
Yes, if your foreign accounts had a combined value over $10,000 at any time during the year, you must file the FBAR regardless of your tax liability. This is a separate reporting requirement with its own deadlines and penalties.
Q: Can I use both the Foreign Earned Income Exclusion and Foreign Tax Credit on the same income?
No, you cannot use both benefits on the same income. However, you can use FEIE on earned income and Foreign Tax Credit on passive income like investments. Choose the strategy that provides the greatest overall tax benefit.
Q: Do expat tax filing deadlines differ from domestic deadlines?
Expats get an automatic two-month extension to June 15 for filing tax returns, but any taxes owed are still due April 15 with interest accruing from that date. You can get additional extensions to October 15 by filing Form 4868 by June 15.
