Why Do I Have to Pay U.S. Taxes If I Live Abroad?
- Why U.S. Citizens Must Pay Taxes While Living Abroad
- Who is Required to File as an Expat?
- 2025 Filing Thresholds (Tax Year 2025)
- Asset Reporting: More Than Just Income
- Do Americans Living Abroad Pay Taxes Twice?
- Do I Have to File U.S. Taxes if I No Longer Live in the U.S.?
- What Income Do Americans Abroad Have to Report?
- 2026 Strategy: Your Path to Expat Tax Compliance
- Frequently Asked Questions
Why U.S. Citizens Must Pay Taxes While Living Abroad
The short answer: Because the United States operates on a system of citizenship-based taxation, not residency-based taxation.
If you’re a U.S. citizen or green card holder, your worldwide income is subject to U.S. tax laws even if you live permanently outside the United States and earn 100% of your income abroad. Whether you’re a digital nomad in Bali or a corporate executive in London, your tax home may be abroad, but your tax obligations remain with the IRS.
Learn the difference between Citizenship-based taxation and Residency-based taxation
Navigate the 2026 Tax Season with Total Confidence
The Reality of Expat Filing
Key Concept: The U.S. is one of only three countries (alongside Eritrea and North Korea) that follows this citizenship-based model. This principle was upheld by the Supreme Court in the landmark case Cook v. Tait (1924), which established that U.S. government protections follow citizens wherever they are.
While the requirement to file is mandatory, it doesn’t always mean you’ll have a tax bill. In fact:
- According to IRS Statistics of Income (SOI) data (Winter 2025), approximately 62% of Americans filing from abroad owe $0 in U.S. federal taxes after applying credits and exclusions.
- In a recent study year, over 437,000 expats used the Foreign Earned Income Exclusion (FEIE) to shield more than $28.5 billion from U.S. taxation.
Who is Required to File as an Expat?
The short answer: Every U.S. citizen and green card holder whose worldwide income exceeds the IRS filing thresholds for their status.
But requirements don’t always reflect reality. While the U.S. State Department estimates nearly 9 million Americans live overseas, IRS data shows a significant “compliance gap.” According to the latest IRS Statistics of Income (SOI) Bulletin, only about 1.1 million returns are filed from foreign addresses annually. This means that while a vast majority of the 9 million likely meet the filing requirements, fewer than 20% are currently in full compliance.
Why the Gap?
The vast majority of the “unfiled” population falls into one of three categories:
- The “Zero-Tax” Assumption: Many believe that because they pay high taxes in countries like the UK or Australia, they don’t need to tell the IRS about it.
- Accidental Americans: People born in the U.S. who moved abroad as children and don’t realize their citizenship carries a lifelong tax filing duty.
2025 Filing Thresholds (Tax Year 2025)
These apply to the returns you are preparing right now in early 2026.
You must file a U.S. federal return if your total income from all sources (U.S. and foreign) exceeds these specific amounts:
| Filing Status | 2025 Filing Threshold |
| Single | $15,750 |
| Married Filing Jointly | $31,500 |
| Head of Household | $23,625 |
| Married Filing Separately | $5 |
| Self-Employed (Net Earnings) | $400 |
The “$5 Rule” Warning: If you are married to a non-U.S. citizen and file separately, your filing threshold is just $5. This is one of the most common reasons expats inadvertently fall out of compliance.
The “Filing Requirement” Checklist
You are legally required to file a 2025 tax return (in 2026) if you meet any of the following “triggers”:
- Income Thresholds: Your gross worldwide income is above the standard deduction for your filing status (e.g., $15,750 for singles in 2025).
- Self-Employment: You earned more than $400 in net earnings from freelance or consulting work.
- Special Taxes: You owe “unrecaptured” taxes, such as alternative minimum tax (AMT) or household employment taxes.
- Asset Reporting: You meet the $10,000 aggregate threshold for foreign bank accounts (FBAR), even if your income is zero.
What Income Must You Report?
The IRS defines “worldwide income” broadly. As an American abroad, you must include:
- Wages and Bonuses: Even if paid by a foreign company into a foreign bank account.
- Self-Employment Income: Freelance, consulting, or “gig” work.
- Investment Income: Dividends, interest, and capital gains from foreign brokerage accounts.
- Rental Income: Revenue from property owned anywhere in the world.
- Pension/Social Security: Benefits received from foreign governments.
Asset Reporting: More Than Just Income
Beyond the standard Form 1040, the IRS tracks international assets through two critical (and often missed) forms. This is where the IRS has increased its enforcement “campaigns” in the last year.
Related Reading: What the New IRS Criminal Investigation Report Signals for Expats in 2026
FBAR vs. FATCA: A Massive Data Difference
Greenback Data Insight: In a recent review of over 500 tax form completions, 50% of expats indicated they did not believe they were required to file an FBAR (FinCEN Form 114). While individual requirements vary, this suggests a massive portion of the expat community may be underestimating their reporting risks.
Why the Confusion?
Many expats mistakenly believe they are exempt because:
- Some expats think that if an account doesn’t have money in it now, it doesn’t count.
- Others assume the $10,000 threshold applies to each individual account. In reality, it is an aggregate total. If you have three accounts with $4,000 each ($12,000 total), you must report all three.
- Many people don’t realize they must report accounts they don’t “own,” such as a business account for an employer where they have signature authority.
Don’t let a simple reporting error lead to 2026 penalties.
Comparing the “Big Two” Asset Forms (2026)
If you missed these in the past, the IRS’s Streamlined Filing Procedures allow non-willful taxpayers to get caught up without the standard penalties.
| Requirement | Threshold (Aggregate) | Reporting To | 2026 Penalty Risk |
| FBAR (FinCEN 114) | Over $10,000 at any point | Dept. of Treasury | $16,536+ (Non-willful) |
| FATCA (Form 8938) | Over $200,000 (Single/Living Abroad) | IRS | $10,000+ |
Do Americans Living Abroad Pay Taxes Twice?
The short answer is usually “No.” U.S. tax law includes three powerful mechanisms to prevent double taxation:
- Foreign Tax Credit (FTC): Provides a dollar-for-dollar credit for taxes paid locally. IRS data shows nearly $29.5 billion in credits are claimed annually.
- Foreign Earned Income Exclusion (FEIE): For the 2025 tax year, you can exclude up to $130,000 of wages (rising to $132,900 for 2026).
- Tax Treaties: The U.S. has treaties with over 60 countries that clarify how items like pensions are taxed.
That said, you still need to file your taxes. Filing is a legal requirement even when your final U.S. tax bill is $0. Failing to file can lead to the loss of these exclusions and the triggering of steep penalties.
Related Article: FEIE vs. FTC: Which Expat Strategy Is Best?
Do I Have to File U.S. Taxes if I No Longer Live in the U.S.?
Yes, if you remain a U.S. citizen or green card holder. Living abroad permanently (even for decades) does not end U.S. tax obligations. The IRS treats you the same as a U.S. resident for filing purposes, regardless of where your “tax home” is located.
How to Formally Exit the U.S. Tax System
There are only two ways to permanently end your U.S. tax filing obligations:
- Renounce U.S. Citizenship: This is a formal process through a U.S. Embassy. Recent data shows a surge in this path, with over 4,800 Americans renouncing in 2024 alone, often citing the complexity of citizenship-based taxation. Note that high-net-worth individuals may be subject to an “Exit Tax” and must file Form 8854 (Expatriation Information Statement) to certify five years of tax compliance.
- Abandon Green Card Status: If you are a long-term resident, you must properly abandon your status using Form I-407. Simply letting a green card expire does not stop the IRS from expecting a tax return.
The “Accidental American” Statistic
Greenback compared State Department population estimates and IRS filing data, it appears that fewer than 15% of Accidental Americans are currently fulfilling their U.S. tax obligations. If you are in this group, the Streamlined Filing Procedures remain the best way to catch up without penalties.
If you’re behind on taxes, you have options. Learn more about IRS Amnesty Programs here.
What Income Do Americans Abroad Have to Report?
The IRS requires U.S. citizens to report worldwide income. This means every dollar (or foreign currency equivalent) you earn must be converted to USD and reported on your return, typically using the Treasury’s annual average exchange rate.
1. Earned Income (Wages & Self-Employment)
This includes salaries, bonuses, and commissions. These are reported on Form 1040, but as an expat, you have access to specialized relief made permanent under the One, Big, Beautiful Bill (OBBB):
- Form 2555 (FEIE): Use this to claim the Foreign Earned Income Exclusion. For the 2025 Tax Year (filing now in 2026), you can exclude up to $130,000. If both you and your spouse qualify, you can shelter a combined $260,000
- Schedule SE (Self-Employment Tax): If you earn more than $400 as a freelancer or contractor, you have to file this to calculate your Social Security and Medicare obligations.
- Form 1116 (Foreign Tax Credit): If your income exceeds the $130,000 FEIE limit, or if you live in a high-tax country, you can use this form to claim a dollar-for-dollar credit for taxes paid to your host government.
2. Foreign Pensions and Social Security
Unlike U.S. 401(k)s, foreign pensions are often “non-qualified” in the eyes of the IRS.
- The “Trust” Trap: If your pension is a foreign trust, you may need to file Form 3520 (Annual Return To Report Transactions With Foreign Trusts).
- Treaty Benefits: Many U.S. tax treaties (like those with the UK, Canada, and Germany) allow you to defer tax on pension growth. This is often claimed via Form 8833.
3. Investment Income & The “PFIC” Alert
Most foreign mutual funds and ETFs are classified as Passive Foreign Investment Companies (PFICs).
- Form 8621: You must file this for each PFIC you own if your aggregate holdings exceed $25,000 (Single) or $50,000 (Joint).
- Punitive Rates: Without a specific election on Form 8621, these are taxed at the top ordinary income rate (up to 37%).
4. Rental Income from Foreign Property
If you rent out a home overseas, you must report the gross income on Schedule E (Form 1040).
- The 30-Year Rule: Under the Alternative Depreciation System (ADS), foreign residential property must be depreciated over 30 years, unlike the 27.5 years used for U.S. homes. Use Form 4562 to calculate this deduction.
- No FEIE: You cannot use the Foreign Earned Income Exclusion on rental income, as it is considered “passive,” not “earned.” You should use the Foreign Tax Credit (FTC) instead.
5. Foreign Business Ownership
If you own 10% or more of a foreign corporation, the IRS classifies it as a Controlled Foreign Corporation (CFC). Under the One, Big, Beautiful Bill (OBBB), the “GILTI” tax was replaced on Jan 1, 2026, by a new regime called Net CFC Tested Income (NCTI).
- The Accrual Trap: Even if you don’t pay yourself a dividend, the IRS may tax your business profits annually.
- The 2026 Rate Increase: Under OBBB, the effective tax rate on these earnings increased from 10.5% to 12.6%.
- Elimination of Qualified Business Asset Investment (QBAI): Previously, you could exclude a 10% return on tangible assets (like machinery). As of 2026, this exclusion is gone. All business income is now subject to the NCTI tax.
- Form 5471: This is the primary information return for CFCs. Missing it carries a $10,000 penalty per year, even if your business made no profit.
- Form 8992: Use this form to calculate your specific NCTI (formerly GILTI) inclusion amount.
Greenback Tip: Most expats can still eliminate this tax through the High-Tax Exception. If your foreign corporation pays a local tax rate of at least 14% (for 2026), you may be able to exclude that income from U.S. taxation entirely.
2026 Strategy: Your Path to Expat Tax Compliance
The U.S. tax system for Americans abroad is undeniably complex, and as we move through the 2026 filing season, the stakes for accuracy have never been higher. With the IRS deploying new data-matching AI and the One, Big, Beautiful Bill (OBBB) enacting permanent shifts in how your income is protected, “guessing” is no longer a viable tax strategy.
Final Takeaways for the 2025 Tax Year (Filing in 2026)
- Filing is Mandatory: If your 2025 income exceeded $15,750 (Single) or you earned more than $400 in self-employment, you must file—even if you owe nothing.
- Double Taxation is Rare: Between the $130,000 FEIE limit and the dollar-for-dollar Foreign Tax Credit, most expats successfully eliminate their U.S. tax bill.
- Asset Reporting is the “New Frontier”: The IRS is increasingly focused on the FBAR and FATCA. If your foreign accounts hit $10,000 at any point, the FBAR is a non-negotiable requirement.
- Catch-up Programs Still Exist: If you are part of the 85% of “Accidental Americans” who aren’t currently filing, the Streamlined Filing Procedures remain your best path to a “penalty-free” fresh start.
For comprehensive guidance on how to file, including detailed information on forms, deadlines, and strategies, see our complete US expat taxes guide.
Don’t Navigate 2026 Alone
Expat tax rules change fast. Whether you’re navigating the new NCTI rules for your foreign business or trying to optimize your PFIC reporting on foreign mutual funds, working with a specialist ensures you don’t leave money on the table, or trigger a costly audit.
Take the first step toward peace of mind today.
Frequently Asked Questions
The United States taxes based on citizenship, not residency. If you are a U.S. citizen or green card holder, you are required to report your worldwide income to the IRS even if you live and work outside the U.S.
Not necessarily, but you usually need to file. Many Americans abroad file U.S. tax returns but owe little or no U.S. tax after applying exclusions or credits, such as the Foreign Earned Income Exclusion or the Foreign Tax Credit.
Yes. Living abroad permanently does not end U.S. tax obligations. As long as you are a U.S. citizen or green card holder, you generally must continue filing U.S. tax returns each year.
Usually not. While you may pay taxes in your country of residence, U.S. tax law includes mechanisms to prevent double taxation, such as the Foreign Earned Income Exclusion, Foreign Tax Credit, and tax treaties.
U.S. citizens abroad must report all worldwide income, including foreign wages, self-employment income, pensions, rental income, and investment income — even if it was earned entirely outside the U.S.
Yes. Filing requirements are based on income thresholds, not whether you ultimately owe tax. Many expats file returns that show zero U.S. tax due, but filing is still required.
This is very common. The IRS offers programs, such as the Streamlined Filing Compliance Procedures, that may allow eligible taxpayers to catch up on past filings and reduce or eliminate penalties if the failure to file was non-willful.
Yes. Many U.S. citizens abroad must file additional reports like the FBAR or FATCA forms if foreign account balances exceed certain thresholds, even when no U.S. tax is owed.
If the total value of your foreign financial accounts exceeds $10,000 at any time during the year, you generally must file an FBAR. FATCA reporting applies at higher asset thresholds for taxpayers living abroad.
If you have foreign income, foreign bank accounts, missed filings, or are unsure which exclusions or credits apply to you, working with a tax professional experienced in expat taxes can help ensure compliance while avoiding overpayment or penalties.
This article provides general information and should not be considered specific tax advice. Tax laws are complex and subject to change. Always consult with a qualified tax professional regarding your specific situation.
