Taxes for US Citizens Living Abroad: What to Know

If you’re a US citizen living abroad, taxes might seem like a no-brainer. That is, until you start researching it. Even if you’ve been living overseas for years, you might be surprised to learn that the IRS expects tax returns from US citizens who earn over a certain amount of money, regardless of where they live.

So, you might ask, why do I have to pay US taxes if I live abroad? Read on to find out about your taxes as an American living overseas. 

Do American Citizens Living Abroad Have to Pay Taxes? 

Yes. The United States is one of only a few countries that taxes its citizens no matter where they live in the world. If you are an American living abroad, you must file a US federal tax return and pay US taxes on your worldwide income no matter where you live. In other words, you are subject to the same rules regarding income taxation as people living stateside. 

Citizenship-Based Taxation: Why Americans Living Abroad Still Pay US Taxes 

The United States takes a rare approach to taxing individual income. Most countries use one of two tax systems: territorial-based and residence-based taxation. 

• In a territorial-based taxation system, the country taxes individuals only on income from sources earned inside that country’s borders. 
• Under residence-based taxation, the country taxes local residents on all income earned from both local and foreign sources. (For nonresidents in these countries, only income earned locally is taxed, similar to the territorial-based system.) 

The US, however, is one of three countries that impose  citizenship-based taxation. (The other countries are Eritrea and North Korea.) Under this system, citizens are always taxed on their worldwide income regardless of where they live.

What Taxes Do I Pay If I Work Overseas? 

In the US tax system, foreign income is taxed at the same marginal rate as any income earned inside the country. 

This means that as an American living abroad, you will need to file a US federal tax return this year if your total income in 2022—regardless of where the income was earned (and in what currency)—exceeds any of the following minimum thresholds: 

• For citizens filing as single:
  • $12,950 if under age 65 
  • $14,700 if age 65 or older 

• For citizens filing as married filing jointly:
  • $25,900 if both spouses are under age 65 
  • $27,300 if one spouse is under age 65 and one is age 65 or older 
  • $28,700 if both spouses are age 65 or older 

• For citizens filing as married filing separately: $5 (No, that’s not a typo! It really is $5.) 

• For citizens filing as self-employed: $400 

• For citizens filing as head of household:
  • $19,400 if under age 65 
  • $21,150 if age 65 or older 

• For citizens filing as a qualifying surviving spouse with a dependent child:
  • $25,900 if under age 65 
  • $27,300 if age 65 or older 

Even if you have not lived in the US at any point during the year and have earned all of your income in a foreign territory, the IRS still IRS will still demand that you file a tax return. 

How Can I Avoid Paying US Taxes Abroad? 

Based on the current US tax laws, the only way to avoid filing a US tax return and paying US taxes abroad is to renounce your US citizenship. Renouncing your US citizenship is a serious and permanent decision that should not be taken lightly. Before considering this option, learn about all the requirements and implications of citizenship renunciation . 

But as long as you are a US citizen or green card holder, you must file a tax return annually and pay the associated taxes while living abroad. However, it is possible to avoid double taxation and reduce your US tax bill using special tax credits, deductions, and exclusions available to Americans living abroad. 

How to Avoid Double Taxation on Foreign Income  

One issue that arises under a citizenship-based taxation system is that an individual could theoretically be doubly taxed on their income—both by their country of current residence and the US. This scenario is especially relevant for an American living abroad full-time who may qualify as a resident in other local tax systems. 

To help avoid this negative consequence, the US tax code contains a provision called the Foreign Earned Income Exclusion (FEIE). Under the 2022 FEIE, expats are permitted to exclude $112,000 of income earned abroad from their US tax obligation.  

Another provision to help avoid double taxation is the  Foreign Tax Credit. This gives Americans a dollar-for-dollar tax credit for the taxes they’ve paid or owe to a foreign government. What makes this provision complex, however, is that it applies to only certain types of income, and there are unique considerations related to each foreign country. 

The United States also has tax treaties with most countries worldwide that help prevent double taxation for its citizens. These treaties set out how much income can be taxed by each country and determine which country has the right to tax specific types of income.

What Happens If US Citizens Don’t File Their Taxes While Living Abroad? 

US citizens who don’t file US taxes while living abroad might not get their passports renewed and may face penalties, interest costs, or even criminal charges. The IRS charges penalties for both late filing and late payments. If your lack of filing is willful—meaning you knowingly avoided your US tax requirements while living abroad—then more serious legal consequences may apply. 

• Failure to File Penalty: 5% of the unpaid taxes for each month the tax return is late, up to 25%. If over 60 days late, there is a minimum penalty of either $450 or 100% of the tax shown as due on the return – whichever is less. 
• Failure to Pay Penalty: 0.5% of the unpaid taxes for each month the tax payment is late, up to 25% 

Fortunately, the IRS does offer a way for Americans abroad to get caught up penalty-free if they didn’t know they needed to file US taxes while living overseas. Regardless of how many years you’ve missed, the Streamlined Filing Compliance Procedures only require you to file the past three years of federal tax returns and the past six years of FBARs, making it a more straightforward, less expensive way to become compliant. 

What Else Is Required for US Taxes Living Abroad? 

When filing your US expat taxes, there are more items you’ll need to report in addition to your earned income. The IRS also requires that you disclose your foreign accounts and assets that cross a certain value threshold. Even your retirement contributions in foreign retirement accounts, which may seem tax-deferred, might be taxable! And if you create and register a company outside the US, there are various forms you will likely need to file each year in order to avoid potential penalties starting at $10,000 per foreign company per year. 

Make sure to familiarize yourself with these additional tax requirements for US citizens living abroad: 

• Foreign Bank Account Reporting (FBAR) 
• Foreign Account Tax Compliance Act (FATCA) 
• Tax Rules for  Passive Foreign Investment Companies 

When it comes to filing US taxes while living abroad, it’s important to know everything you are required to report in your filing. 

Moved Abroad Recently & Have Questions about Your US Expat Taxes? We’re Here to Help!

We hope this guide has helped you understand your tax obligations as an American living abroad. Contact us, and one of our customer champions will gladly help. If you need very specific advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.