Why Do I Have to Pay U.S. Taxes If I Live Abroad?

The United States is one of only three countries in the world that taxes citizens based on citizenship rather than residence (along with Eritrea and North Korea). This means you must file US tax returns no matter where you live.

If you just discovered this reality, you’re probably feeling frustrated, confused, or even angry. Why should you pay taxes to a country where you don’t live, don’t use services, and may rarely even visit?

Here’s the critical context that brings relief: while you must file US tax returns, most expats owe absolutely nothing in US taxes. The system requires filing, but it also provides powerful protections specifically designed to prevent double taxation.

Let’s explore why this system exists, what it actually means for you, and why it’s far less burdensome than it initially appears.

What Is Citizenship-Based Taxation?

Most countries use residency-based taxation, where you pay taxes on your income where you live and work, regardless of your nationality. Move from France to Germany? You stop paying French taxes and start paying German taxes. Simple.

The United States employs a citizenship-based taxation system, where your tax obligations are determined by your citizenship, not your residence. U.S. citizenship comes with the requirement to file U.S. tax returns, reporting your worldwide income, regardless of where you live.

This means:

• Living in London and working for a British company? File US taxes.
• Retired in Portugal on a foreign pension? File US taxes.
• Digital nomad earning income across Southeast Asia? File US taxes.
• Teaching English in Japan with no US income? Still file US taxes.

Your obligation to file US tax returns continues until you either renounce your US citizenship or relinquish your green card. Living abroad for decades doesn’t change this requirement.

The Historical Origins: Why Does This System Exist?

Civil War Era Roots

The origins of citizenship-based taxation date back to the Revenue Act of 1861, during the American Civil War. Congress needed to fund the war effort and included language taxing “any citizen of the United States residing abroad.”

The Wall Street Journal reports the intent was partly to discourage wealthy citizens from fleeing their civic duties during a national crisis. The message is clear: you can’t escape your obligations to the nation by moving overseas during wartime.

This temporary wartime measure eventually became permanent policy, outlasting its original purpose by over 160 years.

Modern Rationale

Today, the US government justifies citizenship-based taxation with three main arguments:

1. Anti-tax avoidance: Preventing wealthy individuals and corporations from dodging taxes by moving money or themselves to low-tax jurisdictions. Without citizenship-based taxation, the argument goes, the ultra-wealthy could easily shelter income abroad.

2. Political inertia: Changing the system requires Congressional action, and any such change faces immediate accusations of being a “giveaway to the rich” or benefiting multinational corporations. No elected official wants that political liability, regardless of how the policy affects ordinary expats.

3. Rights and privileges of citizenship: The government’s position is that US citizenship provides valuable benefits – passport rights, consular protection, the right to return and live in the US, voting rights – that justify continued tax filing obligations even while living abroad.

The Disconnect: Why Expats Find This Unfair

The frustration expats feel is legitimate and understandable. Consider these realities:

• You’re already paying taxes where you live. You pay for the roads, schools, healthcare, and infrastructure in your host country. Then the US requires you to file again on the same income.
• You’re not using US services. Your kids aren’t in US schools. You’re not driving on US highways. You may not have set foot in the US for years.
• The filing burden is significant. Expat tax returns are complex, often requiring professional help that costs $500-$700 or more annually. Even when you owe nothing, the compliance burden is a genuine concern.
• Other countries don’t do this. Your British, German, or Canadian friends living abroad have no such obligation. They moved, and their tax obligations moved with them.
• The assumption of tax evasion. The system treats expats as potential tax cheats rather than ordinary citizens who happen to live elsewhere, requiring extensive reporting of foreign accounts and assets.

These frustrations are valid. The system is unusual, burdensome, and often feels unjust to those who move abroad for work, love, or adventure, rather than tax avoidance.

Myth vs Reality: What This Actually Means for You

Let’s address the common fears and misconceptions:

Myth: “I’ll Pay Double Taxes on Everything”

Reality: The US tax system includes specific protections to prevent double taxation. Most expats pay little to nothing in additional US taxes.

According to IRS data from 2016-2021, nearly two out of three expats who file owe $0 in US taxes. This isn’t because of loopholes – it’s because the system includes deliberate safeguards.

Myth: “If I Don’t Live There, I Don’t Have to File”

Reality: Residence doesn’t determine filing obligations – citizenship does. You must file regardless of where you live.

However, expats get an automatic two-month extension, moving the expat deadline from April 15 to June 15. You can request additional extensions if needed.

Myth: “I Can Ignore This and Nothing Will Happen”

Reality: Foreign banks now report US citizen account information directly to the IRS under FATCA (Foreign Account Tax Compliance Act). The IRS has the tools to identify non-compliant expats.

The good news? If your non-filing was unintentional, the Streamlined Filing Compliance Procedures can help you catch up penalty-free.

Myth: “Getting a Second Passport Solves This”

Reality: Unless you formally renounce US citizenship (a serious decision with significant consequences), you remain subject to US tax filing requirements regardless of other citizenships you hold.

The Bottom Line: You Must File, But You Probably Won’t Owe

Here’s what citizenship-based taxation actually means in practice:

• You must file US tax returns annually. This is non-negotiable and applies to virtually all US citizens abroad who meet minimum income thresholds.
• Most expats owe $0 after applying available protections. The Foreign Earned Income Exclusion alone can exclude up to $130,000 for the 2025 tax year, and the Foreign Tax Credit eliminates double taxation for expats in high-tax countries.
• Filing is how you claim your protections. Think of your tax return as paperwork that confirms you owe nothing, rather than a bill demanding payment.
• The compliance burden is real. Even when you owe nothing, preparing an expat tax return requires gathering foreign income documentation, reporting foreign accounts, and often paying a professional preparer.
• The requirement follows you until you renounce. This is a lifelong obligation of US citizenship, not something that expires after living abroad for a certain time.

What You Need to Know About Your Obligations

As a US citizen abroad, you’ll need to be aware of:

• Federal Income Tax: File Form 1040 if your worldwide income exceeds filing thresholds
• Foreign Bank Account Reporting (FBAR): Report foreign accounts totaling $10,000+ at any time during the year
• FATCA Reporting: Report significant foreign financial assets on Form 8938
• State Taxes: Some states continue taxing former residents even after moving abroad
• Self-Employment Tax: Self-employed expats typically owe the US self-employment tax even when using the FEIE

For comprehensive guidance on how to file, including detailed information on forms, deadlines, and strategies, see our complete US expat taxes guide.

The Two Main Protections That Save You Money

While you must file, two powerful tools typically eliminate US tax liability:

The Foreign Earned Income Exclusion (FEIE): Excludes up to $130,000 (2025 tax year) of foreign earned income from US taxation. Married couples can exclude up to $260,000 if both spouses qualify.

The Foreign Tax Credit (FTC): Get a dollar-for-dollar credit for foreign income taxes paid. If you live in a high-tax country, this often eliminates your entire US tax bill.

These aren’t loopholes – they’re deliberate policy tools designed to prevent the double taxation that citizenship-based taxation would otherwise create.

Could This System Ever Change?

Reform proposals surface periodically, usually advocating for residence-based taxation like most of the world uses. However, change faces significant obstacles:

• Political resistance: Any reform is easily characterized as benefiting the wealthy or corporations, making it politically toxic.
• Revenue concerns: Though most expats owe nothing, citizenship-based taxation does capture significant revenue from high earners abroad.
• Implementation complexity: Switching systems would create massive transition challenges and temporary “stateless” taxation periods.
• Lack of a political constituency: The approximately 9 million Americans abroad represent a small, dispersed group with limited political power.

For the foreseeable future, citizenship-based taxation appears here to stay. Understanding how to work within the system becomes more practical than waiting for reform.

What About Renunciation?

Some expats consider renouncing US citizenship to escape filing obligations. This is a permanent, irreversible decision with significant consequences:

• Loss of the right to live or work in the US
• Loss of a US passport and its travel benefits
• Potential exit tax for high net worth individuals
• Difficulty visiting family in the US (need a visa)
• Expensive and time-consuming process

For most expats, renunciation is far more extreme than necessary. When you owe $0 after filing, maintaining citizenship while managing the compliance burden makes more sense than giving up your citizenship permanently.

Get Help with Your US Taxes as an Expat

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 and experiencing firsthand the challenges of living abroad.

We understand the frustration of citizenship-based taxation. We can’t change the law, but we can make compliance as painless as possible. We’ve helped over 23,000 expats file over 71,000 returns while maintaining a 4.9 star average across 1,200+ TrustPilot reviews.

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 about US expat taxes or working with Greenback, contact our Customer Champions.

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.