Expat Tax Residency in United States

Who is a US tax resident under federal rules?

The US imposes income tax on three categories of taxpayers under IRC §7701(b) and IRC §61 [SC1]:

1. US citizens: Taxed on worldwide income regardless of where the citizen lives. This obligation does not pause when a citizen moves abroad. A US citizen working in Tokyo or living in Paris owes US tax on Japanese and French income alongside any US-source income. The obligation continues until the citizen renounces citizenship (which triggers expatriation tax under IRC §877A for filers above net-worth or income thresholds).
2. Resident aliens: Non-citizens who meet either the green-card test (lawful permanent resident from the first day of LPR status) or the Substantial Presence Test (SPT). Taxed on worldwide income, like citizens.
3. Non-resident aliens: Non-citizens who fail both the green-card test and the SPT. Taxed only on US-source income and on income effectively connected with a US trade or business (ECI).

The US is one of only two countries (Eritrea is the other) that taxes citizens on worldwide income regardless of residence. Most countries — including every major US trading partner — operate on residency-only systems. The mismatch is the source of the bulk of expat-tax complexity, particularly for US citizens who have never lived in the US (so-called accidental Americans).

How does the Substantial Presence Test work?

The Substantial Presence Test (SPT) under IRC §7701(b)(3) makes a non-citizen a US resident alien for a given year if both prongs are met [SC1]:

• 31-day current-year prong: Physically present in the US for at least 31 days during the current calendar year.
• 183-day weighted prong: Physically present in the US for at least 183 days across the three-year period ending with the current year, counting all days in the current year, one-third of the days in the immediately preceding year, and one-sixth of the days in the second preceding year.

The weighted formula matters: a non-citizen who spent 122 days in the US each year for three consecutive years has 122 + 122/3 + 122/6 = 122 + 40.67 + 20.33 = 183 days. That filer would meet the SPT and be a resident alien even though they never crossed the 183-day annual threshold.

Days in the US count if the person was physically present any portion of the day, with limited exceptions for medical-condition days, exempt-individual days (foreign-government employees, students on F/J/M/Q visas during their initial five years, professional athletes competing in charity events), and transit days under specific definitions. Days in US possessions (Puerto Rico, Guam, etc.) generally do not count for SPT purposes.

A non-citizen who meets the SPT can override the resident-alien result via two paths:

• Closer Connection Exception (IRC §7701(b)(3)(B)): The filer was present in the US fewer than 183 days during the current year, has a tax home in a foreign country, and has a closer connection to that foreign country than to the US. Filed via Form 8840.
• Treaty Tie-Breaker: If the filer is also a resident of a country with a US bilateral tax treaty, the tie-breaker rules in the treaty's residence article (typically Article 4) determine residency. Filed via Form 8833. The treaty tie-breaker can override the SPT result but does NOT relieve the filer from US worldwide-income reporting — instead, it positions the filer as a non-resident alien for US tax purposes while satisfying the foreign-country tax obligation.

What is the Foreign Earned Income Exclusion (FEIE)?

IRC §911 allows US citizens and resident aliens working abroad to exclude up to USD 130,000 of foreign-earned income for tax year 2025 from US taxable income [SC2]. The exclusion is per qualifying filer; an MFJ couple where both spouses qualify can exclude up to USD 260,000 combined. The cap is adjusted annually by Rev. Proc. 2024-40 for inflation.

To qualify, the filer must meet two tests:

1. Tax home test: The filer's tax home (regular place of business) must be in a foreign country.
2. Either the bona-fide-residence test or the physical-presence test:
   • Bona-fide residence: Resident of one or more foreign countries for an uninterrupted period that includes an entire tax year. Limited US trips allowed.
   • Physical presence: Present in foreign countries for at least 330 full days during any 12-consecutive-month period that includes the relevant tax year (or a portion thereof, prorated).

Foreign-earned income is wages, salary, and self-employment income for services performed in a foreign country. It does NOT include passive income (interest, dividends, capital gains, rental income unrelated to active business), pension distributions, or amounts paid by the US government or its agencies (military pay, embassy salaries, etc.). The election is made on Form 2555.

The FEIE interacts with the housing exclusion or deduction under IRC §911(c). The housing exclusion (for employee filers) or housing deduction (for self-employed filers) covers reasonable housing expenses above a base amount (16 percent of FEIE cap, or USD 20,800 for 2025) up to a cap that varies by city. London, Hong Kong, Tokyo, Singapore, Geneva, and Zurich have elevated housing caps reflecting higher cost of living. Form 2555 also computes this.

FEIE election decisions are sticky: a filer who elects FEIE then later revokes the election cannot re-elect for five tax years without IRS consent under Rev. Rul. 90-77. The election is also affected by the requirement to file Form 1040 — failure to file timely can be deemed a failure to elect, foreclosing the exclusion for that year.

How does the Foreign Tax Credit (FTC) work?

IRC §901 provides a credit against US income tax for foreign income tax paid or accrued by the US filer on foreign-source income [SC3]. The FTC is the primary alternative to FEIE for US persons living abroad — and frequently the better choice when the foreign country has a higher effective tax rate than the US.

Mechanics:

• The FTC is computed on Form 1116, separately for each category of income (passive, general, GILTI, foreign-branch). The credit in each category is limited to the US tax that would apply to that foreign-source income (the "FTC limitation").
• Foreign tax in excess of the limitation in a given year carries back one year and forward ten years under IRC §904(c).
• For filers with total foreign tax below USD 300 (single) or USD 600 (MFJ) and only passive-category foreign income reported on a 1099-DIV or 1099-INT, the simplified FTC election allows claiming the FTC directly on Form 1040 Schedule 3 without filing Form 1116.
• FTC and FEIE can be combined: FEIE excludes foreign-earned income up to the cap; FTC credits foreign tax on income not excluded by FEIE (e.g., wages above the cap, passive income).

The FTC-vs-FEIE choice typically depends on the foreign jurisdiction's tax rate:

• High-tax country (e.g., Germany, France, UK, Australia, Japan, Belgium): FTC usually better because foreign tax often exceeds the US tax on the same income, leaving the entire US liability covered.
• Low-tax country (e.g., Dubai/UAE, Singapore depending on income type, Hong Kong, Bahamas): FEIE usually better because there is little foreign tax to credit.
• Mid-tax country depends on income mix and personal factors; modeling both paths is common.

The FTC vs FEIE crossover, the related deduction-vs-credit choice on foreign taxes, and the carryback/carryforward mechanics make tax pro engagement common for filers above the FEIE cap. Filers managing cross-border salary payments through multi-currency accounts often use WorldFirst for the underlying USD-to-foreign currency conversion side of the income stream.

FBAR (FinCEN Form 114) reporting

The Report of Foreign Bank and Financial Accounts (FBAR), filed on FinCEN Form 114, is required for any US person with a financial interest in or signature authority over one or more foreign financial accounts whose aggregate value exceeds USD 10,000 at any point during the calendar year [SC4]. FBAR is filed electronically with the Financial Crimes Enforcement Network (FinCEN), not with the IRS, and it is separate from the federal income tax return.

Key points:

• Aggregate threshold: USD 10,000 is the aggregate across all reportable accounts, not per account. Three accounts of USD 4,000 each (USD 12,000 aggregate) trigger FBAR; ten accounts of USD 900 each (USD 9,000 aggregate) do not.
• Reportable accounts: Bank accounts, securities accounts, mutual fund accounts, certain insurance products with a cash value, and (per FinCEN Notice 2020-2) eventually crypto exchange accounts on foreign platforms — although the FBAR-crypto amendment has not been promulgated as of mid-2026.
• Filing deadline: April 15 with automatic extension to October 15. Late filing carries non-wilful penalty up to USD 16,000 per violation (inflation-adjusted from the USD 10,000 statutory base) and wilful penalty up to the greater of USD 161,000 or 50 percent of account balance, per United States v. Bittner (2023) interpreting the FBAR statute.
• Signature authority without ownership: An employee with signature authority over an employer's foreign corporate account whose own personal accounts are below the threshold may still owe FBAR for the signature-authority interest, though IRS extension orders have provided ongoing relief for certain categories.

FBAR delinquency is among the most penalty-rich corners of US tax compliance. The Streamlined Filing Procedures (described below) provide a path to compliance without civil FBAR penalty for non-wilful violations supported by a credible certification.

Form 8938 (Statement of Specified Foreign Financial Assets)

Form 8938 is the FATCA-driven reporting form for individual filers, attached to Form 1040 [SC5]. The thresholds are materially higher than FBAR and depend on filing status and US-vs-abroad residence:

Form 8938 covers a broader asset universe than FBAR: any "specified foreign financial asset" — financial account at a foreign institution, stock or security issued by a foreign person, financial instrument or contract held for investment that has an issuer or counterparty who is not a US person, and any interest in a foreign entity. Foreign-issued stock held in a US brokerage account is generally NOT a specified foreign financial asset for 8938 purposes (the asset is held through a US institution); the same stock held directly with a foreign issuer or in a foreign account IS a specified foreign financial asset.

Penalty for failure to file Form 8938 is USD 10,000 base, with additional USD 10,000 increments per 30-day period after IRS notice up to a cap of USD 50,000. The penalty stacks with FBAR penalties when both forms are required and missed.

Streamlined Filing Procedures and IRS amnesty paths

For US persons who have failed to file FBAR, Form 8938, or full federal returns due to non-wilful conduct, the IRS Streamlined Filing Procedures provide a path to compliance without civil penalty [SC6]. The two streams are:

• Streamlined Foreign Offshore Procedures (SFOP): For US persons living abroad. No civil FBAR penalty, no failure-to-file penalty, no accuracy-related penalty. Requires filing the past three years' federal returns (or amendments), six years of FBARs, and a signed Form 14653 certification that the non-compliance was non-wilful.
• Streamlined Domestic Offshore Procedures (SDOP): For US persons living in the US. Civil FBAR penalty is 5 percent of the highest aggregate foreign account balance during the past six years, but no failure-to-file or accuracy-related penalty. Requires three years of returns, six years of FBARs, and Form 14654 certification.

Non-wilfulness certification is the crux of the program. Filers who cannot credibly certify non-wilfulness should not enter Streamlined and should consult counsel about the alternative Offshore Voluntary Disclosure Program (OVDP) or its successor frameworks, which carry higher penalties but reduced criminal-prosecution risk.

The Delinquent FBAR Submission Procedures (DFSP) and Delinquent International Information Return Submission Procedures (DIIRSP) cover narrower cases: filer has filed the federal return but missed one of the international information returns. DFSP carries no penalty when the unreported income was reported correctly on the federal return and the filer had reasonable cause.

Expatriation tax under IRC §877A

US citizens who renounce citizenship and long-term green-card holders (LPR for 8 of the last 15 years) who give up their status face expatriation tax under IRC §877A if they meet any of three tests at the time of expatriation [SC7]:

1. Net-worth test: Net worth of USD 2 million or more on the expatriation date.
2. Tax-liability test: Average annual net US income tax liability over the five years before expatriation exceeded a threshold (USD 206,000 for 2025, adjusted annually).
3. Compliance test: Failure to certify on Form 8854 that all federal tax obligations for the five preceding years have been met.

A covered expatriate is treated as having sold all property at fair market value on the day before expatriation, recognizing gain in excess of an exclusion amount (USD 890,000 for 2025) at the long-term capital gains rate. Deferred compensation, specified tax-deferred accounts, and beneficial interests in non-grantor trusts have separate treatment under §877A subsections (d) through (f), generally subjecting them to 30 percent withholding on later distributions.

The expatriation tax is sometimes called the "exit tax," though that term is not in the Code. Pre-expatriation planning typically involves a credentialed cross-border tax practitioner; the US tax-pros directory lists firms with expatriation experience. Filers handling cross-border 1099 payments to international contractors before exit often e-file via Tax1099.

Treaty residency tie-breaker and Form 8833

US bilateral tax treaties contain a residence article (typically Article 4) that resolves dual-residence situations through a tie-breaker hierarchy. The OECD model treaty hierarchy is:

1. State where the individual has a permanent home available; if both, then
2. State of closer personal and economic relations ("center of vital interests"); if both or neither, then
3. State of habitual abode; if both or neither, then
4. State of nationality; if both or neither, then
5. Resolved by mutual agreement between the competent authorities of the two states.

A US citizen invoking treaty residency to be treated as a foreign-country resident faces the saving clause in every US tax treaty: the US retains the right to tax its citizens and certain residents as if no treaty existed, with limited exceptions. The saving clause is the reason a US citizen abroad cannot use treaty residency to escape US worldwide-income obligation entirely. The saving clause typically does NOT cover certain Article 17 (pensions) or Article 22 (other income) provisions, so partial treaty relief survives the saving clause for those categories.

Form 8833 is filed to disclose any treaty-based return position that reduces US tax. Failure to file Form 8833 when required carries a USD 1,000 per failure penalty for individuals (USD 10,000 for entities). The full treaty mechanics are covered in the Tax treaty relief crossover.

State-level expat residency considerations

A filer who moves abroad does not automatically sever state-tax residency. State residency is governed by each state's statutes, which often look to physical presence (more than 183 days in some states), domicile (intent to remain or return), and indicia such as drivers license, voter registration, real-estate ownership, and family location. Several states are particularly aggressive about retaining residency claims on expats: California, New York, New Jersey, Pennsylvania, and Virginia are commonly cited.

A filer planning a move abroad typically establishes residency in a no-state-income-tax state (Florida, Texas, Washington, Nevada, etc.) before the international move to break the high-tax state's claim. Indicia of the new state's residence — drivers license, voter registration, vehicle registration, real-estate purchase or lease, in-state bank accounts — are documented; indicia of the old state are severed.

For the federal-level expat picture taken with US country-overview detail, see the US federal tax overview. For interaction with capital-gains taxation, the Capital gains tax crossover covers the long-term rate brackets and NIIT. For crypto held abroad, see Crypto taxation. For treaty relief mechanics, see Tax treaty relief. The Expat tax topic hub compares US treatment with major destination jurisdictions.