Expat Tax Residency in United States

Why does the US tax citizens living abroad?

The United States is one of only two countries in the world that imposes income tax on its citizens based on citizenship rather than residence. Under IRC Section 61, US citizens and lawful permanent residents (green-card holders) owe federal income tax on worldwide income from all sources, regardless of where they live or work. A US citizen who relocates to Germany, Singapore, or anywhere else does not stop being a US taxpayer. The obligation runs uninterrupted until the citizen formally renounces citizenship. This is known as citizenship-based taxation (CBT), and it is the foundational rule that drives every other expat-tax obligation described on this page. The IRS explains the full scope of the requirement in Publication 54 [SC2] and Publication 519 [SC1]. Filers who have not been meeting this obligation may be eligible for the IRS Streamlined Filing Compliance Procedures [SC6] to come current without most civil penalties.

How does the Substantial Presence Test determine US tax residency for non-citizens?

Non-citizens who are not lawful permanent residents become US resident aliens under the Substantial Presence Test (SPT) established by IRC Section 7701(b). The test has two prongs, both of which must be satisfied in the same calendar year:

• 31-day current-year prong: The person must have been physically present in the US for at least 31 days during the current year.
• 183-day weighted prong: The person must accumulate at least 183 weighted days across the current year and the two preceding years, using this formula: all days present in the current year, plus one-third of days present in the immediately preceding year, plus one-sixth of days present in the second preceding year.

The weighting formula can produce a resident-alien result even when the individual never exceeds 122 days in any single year. For example, 120 days in each of 2023, 2024, and 2025 yields 120 + (120 x 1/3) + (120 x 1/6) = 120 + 40 + 20 = 180 days -- just short of the threshold. At 122 days per year the total is 122 + 40.67 + 20.33 = 183 days exactly, meeting the test.

Exceptions reduce the day count: days where the individual could not leave due to a medical condition that arose in the US, days for foreign-government officials (A or G visa holders), teachers and trainees on J or Q visas during the applicable exempt period, students on F, J, M, or Q visas, and professional athletes competing in charitable sporting events [SC1]. A non-citizen who meets the SPT may still be treated as a non-resident alien by invoking the Closer Connection Exception (Form 8840) if present fewer than 183 days in the current year and maintaining a tax home and stronger ties in a foreign country, or by invoking a treaty tie-breaker through a Form 8833 disclosure.

What is the Foreign Earned Income Exclusion and how is it claimed?

IRC Section 911 allows qualifying US citizens and resident aliens to exclude foreign-earned income from US taxable income up to an annual cap that is adjusted for inflation. For 2025 the cap is $130,000 per qualifying filer, confirmed in the 2025 Form 2555 Instructions [SC3]. A married couple filing jointly in which both spouses qualify can exclude up to $260,000 combined.

Foreign-earned income means wages, salaries, professional fees, and self-employment income for services performed in a foreign country. It excludes passive income (interest, dividends, capital gains), pension distributions, US government pay, and income treated as US-source.

To qualify, the filer must satisfy the tax home test (regular or principal place of business located in a foreign country) and one of two residence/presence tests:

• Bona fide residence test: A US citizen or eligible resident alien who is a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year.
• Physical presence test: Physically present in one or more foreign countries for at least 330 full days during any 12-consecutive-month period.

The exclusion is claimed on Form 2555, attached to Form 1040. In addition, the housing exclusion (for employees) or housing deduction (for self-employed filers) under IRC Section 911(c) covers qualifying housing costs above a base amount of $20,800 for 2025 (16 percent of the $130,000 cap), up to a city-specific ceiling. High-cost cities such as Hong Kong, Singapore, London, Geneva, and Tokyo carry elevated housing caps set annually in IRS Notice.

Once elected, the FEIE election is presumed renewed each year until revoked. A revocation prevents re-election for five tax years without IRS consent under Rev. Rul. 90-77.

How does the Foreign Tax Credit offset double taxation?

The Foreign Tax Credit (FTC), authorized by IRC Section 901 and computed on Form 1116, credits income taxes paid or accrued to a foreign country against the US income tax liability on the same foreign-source income [SC4]. The FTC and the FEIE are the two primary mechanisms Congress created to reduce the double-taxation burden on Americans abroad, and filers typically model both to identify which produces the better result.

The credit in each income category (passive, general, GILTI, foreign-branch) is capped at the portion of US tax attributable to foreign-source income -- the FTC limitation. Excess FTC in a given year carries back one year and forward ten years under IRC Section 904(c). For filers with $300 or less in total creditable foreign taxes from passive income reported on 1099s (or $600 for MFJ filers), a simplified election allows claiming the credit directly on Schedule 3 of Form 1040 without Form 1116.

FTC and FEIE can be layered: the FEIE absorbs the first $130,000 of foreign-earned income (2025), and the FTC covers foreign taxes on amounts above the exclusion cap and on non-excluded categories such as passive income. FTC tends to be more advantageous when the host country's effective rate exceeds the US marginal rate (common in high-tax jurisdictions such as Germany, France, the UK, Scandinavia, and Australia). FEIE is generally more advantageous in low-or-no-tax jurisdictions such as the UAE, Bahrain, or the Cayman Islands, where there is little foreign tax to credit.

FBAR and FATCA: what foreign account reporting is required?

Separate from the income-tax return, US persons with foreign financial accounts must meet two parallel disclosure regimes:

FBAR -- FinCEN Form 114: Filed electronically with the Financial Crimes Enforcement Network (not with the IRS), the FBAR is due April 15 with an automatic extension to October 15. It is required whenever the aggregate value of all reportable foreign financial accounts -- bank accounts, securities accounts, mutual fund accounts, and certain cash-value insurance or annuity products held at a foreign institution -- exceeded $10,000 at any point during the calendar year [SC5]. The aggregate threshold looks across all accounts; three accounts of $3,500 each trigger FBAR. Civil penalties for non-wilful failure are up to $16,000 per violation (inflation-adjusted); wilful violations carry the greater of $161,000 or 50 percent of the account balance.

Form 8938 -- FATCA reporting: Attached to Form 1040, Form 8938 reports specified foreign financial assets, which include foreign financial accounts and directly held foreign-issued financial instruments and entity interests not held through a US financial institution [SC5]. Thresholds depend on filing status and residence:

FBAR and Form 8938 are not duplicative -- both can be required on the same set of accounts, and separate penalties apply to each. Failure to file Form 8938 carries a $10,000 base penalty, rising by $10,000 increments per 30-day period after IRS notice, up to a maximum of $50,000.

What is the Section 877A exit tax for covered expatriates?

US citizens who formally renounce citizenship, and long-term lawful permanent residents (those who held LPR status for at least 8 of the 15 years ending with the year of expatriation) who terminate that status, may be subject to the mark-to-market exit tax under IRC Section 877A if they meet any one of three criteria at the time of expatriation [SC7]:

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

A person who meets any one of these tests is a "covered expatriate." IRC Section 877A treats a covered expatriate as having sold all worldwide property at fair market value on the day before the expatriation date (mark-to-market). Net gain recognized on the deemed sale above an exclusion amount of $890,000 for 2025 (inflation-adjusted annually) is taxed in the year of expatriation at applicable capital gains rates. Deferred compensation, specified tax-deferred accounts, and interests in non-grantor trusts have separate withholding rules under Section 877A subsections (d) through (f). Form 8854 (Initial and Annual Expatriation Statement) is required and carries a $10,000 penalty for failure to file.

For the broader US federal tax landscape, see the United States country overview. Tax obligations involving FEIE elections, Form 1116 carryforwards, state-residency severance, and Section 877A pre-expatriation planning are technically complex; consulting a qualified tax professional with cross-border experience is the appropriate next step for filers in any of the situations described on this page.