Expat Tax Planning Guide: US Citizens Living Abroad

The United States is unusual: it taxes citizens on worldwide income no matter where they live. That means a US citizen working in Berlin, Tokyo, or São Paulo still files a US return — but several mechanisms prevent double taxation, and specific reporting forms (FBAR, FATCA) are mandatory once foreign accounts cross certain thresholds. This guide covers the Foreign Earned Income Exclusion, the Foreign Tax Credit, the reporting regimes, and the exit-tax rules you must know before renouncing citizenship.

Foreign Earned Income Exclusion (FEIE)

The FEIE lets qualifying US citizens and resident aliens exclude a large portion of foreign-earned income from US tax. For 2026 the maximum exclusion is about $126,500 (indexed annually). To qualify you must meet one of two tests:

• Physical Presence Test: be present in a foreign country (or countries) for 330 full days during any 12-month period.
• Bona Fide Residence Test: be a bona fide resident of a foreign country for an entire tax year.

The exclusion applies only to earned income (wages, self-employment), not to passive income like dividends or rents. File with Form 2555.

Foreign Tax Credit (FTC)

If you pay income tax to your country of residence, the Foreign Tax Credit (Form 1116) lets you credit those taxes against your US liability, dollar for dollar, preventing double taxation. You generally choose FEIE or FTC — often FTC is better if your foreign tax rate exceeds the US rate, because it can carry forward and also covers passive income.

FBAR and FATCA

• FBAR: if the aggregate value of your foreign financial accounts exceeds $10,000 at any point in the year, you must file FinCEN Form 114 (FBAR). This is separate from your tax return.
• FATCA: Form 8938 reports specified foreign financial assets above higher thresholds; penalties for non-compliance are severe.

The IRS addresses both in Publication 54 (Tax Guide for US Taxpayers Abroad). Missing these forms draws steep penalties regardless of whether you owe US tax.

Expatriation (Renouncing Citizenship)

Renouncing US citizenship can trigger an exit tax if you are a "covered expatriate" — generally if your net worth exceeds $2 million, or your average annual net income tax over the prior 5 years exceeds about $201,000 (2025 figures, indexed), or you fail certain certification tests. The exit tax approximates a deemed sale of worldwide assets. This is a serious, irreversible step requiring expert advice.

State Taxes Abroad

Even living abroad, you may still be tied to a US state. States do not all recognize the FEIE, and some (for example, California, New York) may tax former residents who have not clearly severed domicile. Establishing a new domicile and cutting ties (license, voter registration, bank, property) matters as much for state tax as federal.

Summary

Use the FEIE and Foreign Tax Credit to avoid double taxation, and never skip FBAR/FATCA reporting — the penalties are harsh and automatic. Plan state domicile carefully, and treat expatriation as a decision requiring professional counsel.