Why Am I Taxed Twice as a US Expat?

According to IRS data from 2016-2021, 62% of Americans who file from abroad owe $0 in federal taxes after applying available exclusions and credits. While the U.S. can legally tax you twice on the same income, most American expats never pay taxes twice. The IRS provides powerful tools like the Foreign Earned Income Exclusion and Foreign Tax Credit that eliminate or significantly reduce double taxation for Americans living abroad.

Let’s walk through exactly how double taxation works and, more importantly, how you can avoid it.

What Is Double Taxation?

Double taxation happens when you’re taxed on the same income by two different countries. For U.S. expats, this typically means paying income tax to both your country of residence and the United States.

The U.S. is one of only three countries in the world that taxes based on citizenship rather than residence. This means even if you live and work abroad, you’re still required to file a U.S. tax return and report your worldwide income to the IRS.

Is this fair? That’s debatable. While groups like Americans Against Double Taxation are working to change these laws, double taxation remains legal under the current U.S. tax code. But here’s what matters most: you have legitimate, IRS-approved ways to protect yourself from paying twice.

Who’s Affected by Double Taxation?

U.S. Citizens Living Abroad

If you’re an American working in another country with income tax, you’re technically subject to taxation by both governments. This includes:

• Corporate expats relocated by their companies
• Self-employed professionals and freelancers
• Digital nomads working remotely from foreign countries
• Retirees living abroad
• Business owners with foreign operations

Accidental Americans

Even if you’ve never lived in the U.S., if you were born to at least one U.S. citizen parent living abroad, you may be a U.S. citizen with filing obligations. This can come as a shock if you’ve never filed U.S. taxes before.

C-Corporation Shareholders

Shareholders in C-corporations face a different type of double taxation. The corporation pays taxes on profits at the corporate level, then shareholders pay personal income tax on dividends they receive from those already-taxed profits.

How Do I Avoid Paying Taxes Twice?

Foreign Earned Income Exclusion (FEIE)

The FEIE allows you to exclude a significant portion of your foreign earned income from U.S. taxation. For tax year 2025 (filed in 2026), you can exclude up to $130,000. If you’re married and both spouses qualify, you can each claim the exclusion for a combined total of $260,000.

What qualifies as earned income:

• Salaries and wages
• Bonuses and commissions
• Self-employment income
• Tips

What doesn’t qualify:

• Interest and dividends
• Capital gains
• Rental income
• Pension payments
• Social Security benefits

To qualify for FEIE, you must meet one of two tests:

1. Physical Presence Test: Spend at least 330 full days in foreign countries during any 12-month period
2. Bona Fide Residence Test: Establish genuine residence in a foreign country for a full tax year

Example: Emily in Thailand

Emily moved to Bangkok and works as a freelance web developer earning $85,000 per year. She qualifies for FEIE under the Physical Presence Test by spending 340 days abroad.

• Foreign earned income: $85,000
• FEIE exclusion: $85,000
• US taxable income: $0
• U.S. tax owed: $0

Foreign Tax Credit (FTC)

The Foreign Tax Credit gives you a dollar-for-dollar credit against your U.S. tax liability for foreign income taxes you’ve paid. Unlike FEIE, the FTC applies to both earned and passive income, making it incredibly versatile.

When FTC works best:

• You live in a high-tax country
• You have passive income (dividends, interest, rental income)
• Your foreign tax rate exceeds the U.S. rate

Key advantage: If your foreign tax credit exceeds your U.S. tax liability in a given year, you can carry the excess backward one year or forward up to ten years.

Example: Marcus in Germany

Marcus works in Berlin earning $120,000 per year. Germany’s tax rate is higher than the U.S. rate.

• U.S. income: $120,000
• German taxes paid: $35,000
• US tax before credits: $30,000
• Foreign Tax Credit applied: $30,000
• US tax owed: $0
• Remaining credit to carry forward: $5,000

Can I Use Both FEIE and Foreign Tax Credit?

Yes, but strategically. You can’t use both on the same dollar of income, but many expats combine them effectively on different income types:

If you earn $150,000 in a high-tax country, you might exclude $130,000 with FEIE and use the Foreign Tax Credit on the remaining $20,000 to eliminate any U.S. tax liability altogether.

What About Tax Treaties?

The U.S. has income tax treaties with over 70 countries designed to prevent double taxation. These treaties can provide additional benefits like:

• Reduced withholding rates on dividends and interest
• Exemptions for certain types of income
• Clarification on which country has primary taxing rights

Important

Nearly all U.S. tax treaties include a “saving clause” that allows the U.S. to tax its own citizens as if the treaty didn’t exist. This means treaties alone won’t prevent double taxation for U.S. citizens, though they can provide helpful supplemental benefits.

Will I Pay Twice in My Situation?

Low-Tax Country Situation

Rachel in Costa Rica (teacher, $55,000 salary)

• Costa Rica tax rate: approximately 10%
• Uses FEIE to exclude the entire $55,000
• Result: $0 U.S. tax owed

High-Tax Country Situation

David in France (corporate employee, $95,000 salary)

• France tax rate: approximately 30%
• French taxes paid: $28,500
• Uses Foreign Tax Credit for the entire liability
• Result: $0 U.S. tax owed

Mixed Income Situation

Jennifer in Spain (real estate investor + remote work)

• W-2 income: $80,000 (uses FEIE)
• Rental income: $30,000 (uses Foreign Tax Credit)
• Result: Minimal or $0 U.S. tax owed after combining both protections

What Mistakes Should I Avoid?

• Not filing at all: Even if you owe nothing, you must file your U.S. tax return to claim these protections. No filing means no FEIE or FTC.
• Missing Form 2555: FEIE isn’t automatic. You must file Form 2555 with your tax return to claim it.
• Revoking FEIE without understanding consequences: If you revoke the Foreign Earned Income Exclusion, you generally can’t claim it again for five years without IRS permission.
• Ignoring state taxes: Some states may still require you to file even if you live abroad. Consider formally establishing residence in a no-income-tax state before moving overseas.
• Forgetting FBAR requirements: If your foreign financial accounts exceeded $10,000 at any time, you must file an FBAR by April 15 (automatic extension to October 15).

What If I’m Behind on Filing?

If you haven’t been filing, you’re not alone, and it’s not too late. The IRS offers Streamlined Filing Compliance Procedures specifically designed for expats who weren’t aware of their filing obligations. This program allows you to:

• File the last three years of tax returns
• Submit six years of FBAR reports
• Claim FEIE and Foreign Tax Credit retroactively
• Avoid most penalties if your failure to file wasn’t willful

The key is to come forward before the IRS contacts you. If you file proactively through the streamlined procedures, you can generally catch up with minimal penalties.

What Should I Do Next?

• If you’re current on filing: Continue claiming FEIE or Foreign Tax Credit annually. Consider whether switching strategies might benefit you as your income or country of residence changes.
• If you’re behind on filing: Contact an expat tax specialist immediately to discuss streamlined procedures. The sooner you catch up, the better your outcome.
• If you’re planning to move abroad: Work with a tax professional before you leave to establish state tax residency, understand your future filing obligations, and plan your approach to FEIE vs. FTC.
• If you’re returning to the U.S.: Plan your final year abroad filing carefully to maximize your final FEIE claim and understand how repatriation affects your tax situation.

You’re Not Going to Pay Twice

Between the Foreign Earned Income Exclusion, Foreign Tax Credit, and strategic planning, it’s very rare that an American living abroad pays significant double taxation. With over 15 years of experience helping Americans abroad, we’ve seen these protections work effectively for expats in 190+ countries.

Greenback is an American company founded in 2009 by U.S. expats for expats. We focused exclusively on expat taxes and always have. Many of our CPAs and Enrolled Agents are expats themselves, and because they live in 14 time zones, they experience firsthand the challenges of living abroad. They have the knowledge and patience to help you navigate the complicated U.S. tax system and your local rules.

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.

If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.

This article is for informational purposes only and does not constitute tax, legal, or financial advice. Tax laws change frequently, and individual circumstances vary. Always consult with a qualified tax professional about your specific situation.