As a U.S. citizen living abroad, you might wonder, “Why do I have to pay U.S. taxes if I live abroad?” The fundamental reason lies within the unique system the United States employs: citizen-based taxation. Under this approach, U.S. citizens are required to report and pay taxes on their worldwide income, irrespective of their residency.
Understanding Citizen-Based Taxation
The United States’ citizen-based taxation principle mandates that all U.S. citizens and resident aliens report and pay federal income taxes on their worldwide income. According to the Internal Revenue Code (IRC) Section 61, “gross income means all income from whatever source derived,” which explicitly includes foreign earnings. Consequently, U.S. citizens are obligated to file taxes and report income earned abroad, even when permanently residing in a foreign country.
This obligation encompasses various sources, including salaries, dividends, capital gains, rents, pensions, and income from foreign financial accounts or foreign financial institutions. Failure to comply with these obligations can result in severe penalties and potential accusations of tax evasion.
Do U.S. Citizens Living Abroad Pay Double Taxes?
One primary concern for citizens living abroad is the issue of double taxation—paying income taxes to both the United States and the foreign country in which they reside. Thankfully, the Internal Revenue Service (IRS) provides several methods to help Americans living abroad avoid double taxation, primarily through tax treaties, the foreign earned income exclusion, and the foreign tax credit.
Foreign Earned Income Exclusion
The foreign earned income exclusion (FEIE) is one of the most effective tax exclusions available for U.S. citizens abroad. Under IRC Section 911, qualifying U.S. citizens may exclude foreign earned income from U.S. taxation up to a specified annual limit, adjusted each tax year for inflation. For 2025, this exclusion amount was $130,000. To qualify, individuals must meet either the bona fide residence test or the physical presence test.
Additionally, the IRS provides for a foreign housing exclusion or foreign housing deduction, allowing further reduction of taxable income based on housing expenses incurred while living abroad.
The Foreign Tax Credit
Another powerful tool to prevent double taxation is the foreign tax credit (FTC), detailed in IRC Section 901. U.S. citizens can claim a tax credit for foreign income taxes paid, directly reducing their U.S. tax liability. The foreign tax credit is particularly beneficial when residing in countries with higher tax rates than the U.S., allowing taxpayers to offset U.S. taxes owed dollar-for-dollar with foreign taxes paid on the same income.
Do I Have to Pay U.S. State Taxes if I Live Abroad?
Whether citizens living abroad owe state taxes depends heavily on their last state of residence before moving overseas. Most states employ residency-based taxation, meaning that once you establish residency abroad, you might not be required to file state taxes. However, some states, such as California, Virginia, and New Mexico, have stringent tax laws that may still obligate citizens living abroad to pay state taxes or file returns. Consulting a tax lawyer or professional specializing in expatriate taxation can clarify state-specific obligations. Learn more in our guide here.
What Are the Tax Filing Requirements for U.S. Expats?
U.S. citizens must file annual income tax returns, reporting all worldwide income and claiming available exclusions, deductions, and credits. Furthermore, paying estimated tax quarterly might be required for certain expatriates whose U.S. tax liability remains high even after applying tax exclusions and credits. T
Reporting Foreign Financial Accounts and Assets
Beyond reporting foreign earned income, U.S. citizens living abroad must comply with specific financial reporting requirements, notably Foreign Bank Account Reporting (FBAR). According to the Bank Secrecy Act, Americans must report their foreign bank accounts annually if the combined value of these accounts exceeds $10,000 at any time during the tax year. Failure to report foreign financial accounts can result in severe penalties.
Additionally, citizens must disclose specified foreign financial assets exceeding certain thresholds under the Foreign Account Tax Compliance Act (FATCA), further reinforcing transparency and compliance with U.S. tax regulations.
Foreign Investments and U.S. Taxes
U.S. citizens living abroad should also be cautious when investing through foreign financial institutions or owning shares in a foreign corporation that qualifies as a Passive Foreign Investment Company (PFIC). PFIC rules can be complex and result in unfavorable tax consequences, highlighting the importance of seeking professional guidance when managing investments abroad.
How to Avoid U.S. Tax on Foreign Income?
While U.S. citizens cannot completely avoid U.S. tax obligations on worldwide income, they can significantly minimize or eliminate their U.S. tax liability through strategic use of available tax benefits. Effective use of the foreign earned income exclusion, foreign tax credit, foreign housing exclusion, and foreign housing deduction, along with complying with international tax treaties, provides practical paths to limit exposure to double taxation and minimize U.S. taxes owed.
Missed U.S. Tax Filings While Living Abroad?
Recognizing the complexity of tax laws and potential ignorance among citizens living abroad regarding their tax filing obligations, the IRS offers several amnesty programs to encourage compliance without penalties. Programs like the Streamlined Foreign Offshore Procedures allow eligible U.S. citizens to file overdue income tax returns and FBARs without penalties if they were unaware of their filing obligations.
These programs are invaluable for citizens who discover late their requirement to file taxes on foreign income and report foreign assets, ensuring compliance without incurring severe fines or legal actions.
Need Help? We Offer Free Tax Advice for U.S. Expats
Navigating the U.S. tax system while living abroad can be overwhelming—but you don’t have to do it alone. Our team offers free tax advice to all U.S. expats. Whether you have questions about filing requirements, double taxation, missed returns, or foreign investments, we’re here to help you make sense of your situation and stay compliant.
Contact us today with any questions about your expat taxes. No stress, no strings—just honest guidance from experts who understand the unique challenges of living overseas.
