If all my income is from U.S. sources but I live entirely abroad, how does my U.S. tax return work?

If all your income is from U.S. sources but you live abroad, you file a Form 1040 as usual with U.S.-source income taxed at regular graduated rates. The Foreign Earned Income Exclusion does not apply because FEIE requires foreign-source earned income based on where services are performed, not where the client is located.

U.S.-source versus foreign-source for services:

• Income is foreign-source if services are performed physically abroad, regardless of the client’s location
• Income is U.S.-source only when services are physically performed in the U.S.

This means that a remote worker in Portugal, paid by a U.S. company for work performed in Portugal, has foreign-source wages, even though the employer is a U.S. company.

Truly U.S.-source income for expats usually means:

• Rental income from U.S. real property (effectively connected)
• U.S. Social Security benefits (source country is U.S.)
• U.S. dividends and interest
• Pension distributions from U.S. retirement plans
• Income from work performed on U.S. trips

How the return looks:

• Worldwide income on Form 1040
• FEIE not available on U.S.-source income
• FTC may offset U.S. tax if a foreign country also taxes the same income (treaty rules and resourcing provisions can help)
• State tax possible if still a state domiciliary

For remote workers with U.S. employers: your wages are typically foreign-source because you perform the services abroad, not U.S.-source. Request that your employer update records to reflect this to support FEIE or FTC claims.

For more on sourcing rules, see our Sources of Income: U.S. vs Foreign.