3 US Tax Benefits Every Expat Thinks They Can Use (But Probably Can’t)
Heard about the new 2025 OBBB tax deductions — like no tax on tips, car loan interest write-offs, or overtime exclusions? If you’re an American abroad, you might be wondering if these new benefits apply to you. The short answer: probably not.
The service industry tips deduction, US car loan interest deduction, and the One Big Beautiful Bill overtime deduction are significantly limited for Americans abroad due to foreign employment laws, compliance requirements, and practical challenges.
What you need to know: While these benefits work for Americans in the US, the Foreign Earned Income Exclusion (increased to $130,000 for 2025) and Foreign Tax Credit typically provide much better protection for expats.
How Does the Service Industry Tips Deduction Work and Why Can’t Most Expats Use It?
The elimination of federal taxes on service industry tips has generated significant interest among American expats working in hospitality, restaurants, and tourism worldwide. Understanding how this benefit works reveals why it’s challenging for most expats to claim.
How the tips deduction works domestically:
The deduction allows qualified service workers to exclude tips from federal income taxation. To qualify, your employer must operate in specific industries (restaurants, bars, hotels, hairdressing, and similar service businesses) and maintain detailed tip reporting systems that comply with IRS requirements. The employer must track all tips received, report them on your W-2, and ensure proper withholding for Social Security and Medicare taxes.
The detailed compliance requirements:
US employers must maintain comprehensive tip reporting systems, including daily employee tip reports, allocation of tips when reported amounts fall below 8% of sales, and proper payroll tax withholding. They also need to file specific forms with the IRS, document tip income, and ensure all cash and credit card tips are appropriately tracked and reported.
Why foreign employers cannot comply:
Foreign employers face insurmountable barriers to meeting these requirements. Most countries don’t have equivalent tip reporting systems, and foreign employers cannot access US payroll systems needed for proper withholding and reporting. Additionally, many countries have fundamentally different employment laws that conflict with US tip reporting requirements.
Specific challenges for expats:
- Documentation gaps: Foreign employers typically cannot provide the detailed tip reporting that IRS requires
- Currency complications: Tips received in foreign currency must be converted to USD using proper exchange rates for each transaction
- Legal conflicts: Some countries prohibit the level of tip tracking required by US law
- Withholding impossibility: Foreign employers cannot withhold US Social Security and Medicare taxes on tip income
Real-world example: A bartender working in London receives £200 in tips weekly. The UK employer cannot provide US-compliant tip reporting, cannot withhold US payroll taxes, and operates under UK employment law that doesn’t recognize US tip reporting requirements. Even if the tips qualify for the deduction, the documentation burden makes claiming it nearly impossible.
Why the FEIE works better: The Foreign Earned Income Exclusion can exclude the bartender’s entire £35,000 annual income (including tips) without requiring detailed US-compliant tip documentation from the UK employer.
How Does the US Car Loan Interest Deduction Work and Why Doesn’t It Benefit Expats?
The new deduction for interest on US-manufactured vehicle loans appears attractive but creates more costs than benefits for Americans living abroad due to the complex requirements and prohibitive logistics of importing vehicles.
How the car loan deduction works:
The deduction allows taxpayers to deduct interest paid on vehicle loans that meet specific US manufacturing requirements. The vehicle must be assembled in the United States, meet domestic content requirements, and the loan must be used specifically for purchasing the qualifying vehicle. The deduction is subject to income limits and phases out at higher income levels.
- Specific manufacturing requirements: Vehicles must be assembled at US manufacturing plants and meet domestic content thresholds. This excludes many vehicles sold by US brands but manufactured overseas. The IRS maintains a list of qualifying vehicles that changes annually based on where manufacturers locate their assembly operations.
- The prohibitive logistics for expats: Importing a US vehicle abroad involves complex logistics that quickly eliminate any tax benefit. First, you face shipping costs ranging from $2,000-$5,000, depending on destination and vehicle size. Ocean freight, insurance, and handling fees add up quickly, and shipping times can extend 6-8 weeks.
- Import duties and taxes destroy the math: Most countries impose substantial import duties on foreign vehicles. European Union countries typically charge 10% import duty plus local VAT (19-25%), effectively adding 30-35% to the vehicle’s value. For a $40,000 vehicle, this means $12,000-$14,000 in additional costs before registration.
- Compliance and modification costs: Foreign countries require imported vehicles to meet local safety and emissions standards. This often requires expensive modifications, including different lighting systems, emissions equipment, speedometer changes, and safety features. These modifications can cost $3,000-$8,000 and may require recertification.
- Insurance and maintenance complications: Imported US vehicles face dramatically higher insurance premiums abroad due to higher theft risk, expensive parts, and limited repair networks. Annual insurance can cost 2-3 times more than local vehicles. Maintenance becomes problematic when local mechanics lack familiarity with US models and parts must be shipped internationally.
Real calculation example: An executive moving to Germany imports a $45,000 SUV:
- Shipping: $4,500
- Import duty (10%): $4,500
- German VAT (19%): $8,550
- Modifications for German compliance: $5,000
- Total additional costs: $22,550
The annual interest deduction of approximately $2,500 takes nine years just to offset the upfront costs, ignoring ongoing higher insurance and maintenance expenses.
Stop guessing. Download the expert guide now.
How Does the OBBB Overtime Deduction Work and Why Are Expats Excluded?
The “One Big Beautiful Bill” overtime deduction has generated excitement, but its fundamental requirement for Fair Labor Standards Act compliance creates an insurmountable barrier for most Americans working abroad.
How the OBBB overtime deduction works:
The deduction allows eligible employees to deduct overtime compensation from their taxable income. To qualify, employees must work for employers covered by the Fair Labor Standards Act, receive overtime pay calculated according to FLSA requirements (time-and-a-half for hours over 40 per week), and maintain detailed records of overtime hours and compensation.
Detailed FLSA requirements:
The Fair Labor Standards Act requires employers to pay non-exempt employees at least 1.5 times their regular rate for hours worked over 40 in a workweek. Employers must maintain detailed records of hours worked, overtime hours, and overtime pay rates. The law also specifies how to calculate overtime for employees with fluctuating schedules, multiple pay rates, or commission-based compensation.
The critical foreign employment exclusion:
FLSA Section 13(f) specifically states that the Act does not apply to “any employee whose entire workweek is performed in a foreign country.” This exclusion exists because Congress recognized that foreign employment operates under different labor laws and the US cannot effectively regulate working conditions abroad.
Why this exclusion eliminates the deduction for most expats:
Since the OBBB overtime deduction requires FLSA compliance, and FLSA doesn’t apply to work performed entirely in foreign countries, Americans working full-time abroad cannot meet the basic qualification requirement. This isn’t a documentation issue or compliance challenge – it’s a fundamental legal exclusion.
Complex scenarios that still don’t qualify: Even situations that might seem to qualify often don’t work:
- Mixed work locations: If you work some weeks entirely abroad and some weeks in the US, the weeks abroad don’t qualify for FLSA protection
- US company foreign operations: Even working for a US company abroad doesn’t trigger FLSA coverage if the work occurs entirely in a foreign country
- Contract workers: Independent contractors abroad don’t qualify as “employees” under FLSA regardless of their working arrangements
Foreign overtime standards create additional barriers:
Countries define overtime differently than US law. The European Union’s Working Time Directive limits weekly hours to 48 but calculates overtime differently than FLSA. Some countries don’t have overtime requirements at all, while others have complex systems based on daily rather than weekly hour limits.
Practical example of why it doesn’t work:
A software developer in Amsterdam works for a US tech company, puts in 50-hour weeks, and receives premium pay for extra hours. However, since their entire workweek occurs in the Netherlands, FLSA doesn’t apply. The Dutch overtime system operates under different rules, and the US company’s foreign subsidiary cannot provide FLSA-compliant overtime documentation. Even if the compensation structure looks similar to US overtime, it doesn’t meet the technical FLSA requirements needed for the deduction.
Documentation impossibility:
Even in rare cases where FLSA might apply, foreign employers typically cannot provide the detailed overtime documentation the IRS requires. They operate under local labor laws, use different payroll systems, and cannot access the US Department of Labor compliance tools needed to document FLSA-compliant overtime.
What Reliably Works: Focus on Proven Expat Protections
Instead of navigating these complicated domestic deductions, successful expats focus on two strategies specifically designed for Americans abroad that consistently deliver results.
Foreign Earned Income Exclusion (FEIE): Exclude up to $130,000 for 2025 from US taxation by meeting either the physical presence test or bona fide residence test. This works regardless of foreign employer compliance or documentation standards.
Foreign Tax Credit (FTC): Claim dollar-for-dollar credits for foreign taxes paid, often eliminating US tax liability completely when foreign rates exceed US rates. This protection works with any foreign tax system without requiring US compliance standards.
How Greenback Helps You Focus on What Works
These complications illustrate why expat taxes require specialized expertise. Greenback is an American company founded in 2009 by US expats for expats. Many of our CPAs and Enrolled Agents are expats themselves, living in 14 time zones, so they understand these challenges firsthand.
We’ve helped over 23,000 expats file over 71,000 returns while maintaining a 4.9-star average on TrustPilot. Our expertise ensures you focus on strategies that reliably work rather than getting distracted by domestic deductions that create compliance headaches abroad.
No matter how late, messy, or complex your return may be, we can help. You’ll have peace of mind, knowing that your taxes were done right using strategies designed specifically for Americans abroad.
Contact us, and one of our Customer Champions will gladly help. If you need specific advice on your tax situation, you can also get a consultation with one of our expat tax experts.
This article provides general information for educational purposes. Individual tax situations vary, and you should consult with a qualified tax professional for advice specific to your circumstances.
