Expat & cross-border

Why do US citizens abroad owe US tax?

The US is one of only two countries (Eritrea is the other) that taxes citizens on worldwide income regardless of residence [SC1]. Most countries — every major US trading partner — operate on residency-only systems. The US citizenship-based regime under IRC §61 and the saving-clause language in every US bilateral tax treaty preserves the US right to tax its citizens as if no treaty were in force, with limited exceptions. The obligation does not pause when a citizen moves abroad and continues until the citizen renounces citizenship (which may trigger expatriation tax under IRC §877A).

A US citizen working in Tokyo or living in Paris owes US tax on Japanese and French income alongside any US-source income. The mismatch with most countries' residency-based systems creates substantial expat-tax complexity. The Foreign Earned Income Exclusion and Foreign Tax Credit are the primary mechanisms that mitigate (but do not eliminate) double taxation. Filing remains mandatory: failure to file penalties accrue at 5 percent of unpaid tax per month up to 25 percent cap, plus 0.5 percent per month failure-to-pay, plus interest. The Streamlined Filing Procedures provide a path to compliance without civil penalty for filers whose non-compliance was non-wilful.

Resident aliens (green-card holders or those meeting the Substantial Presence Test) are also taxed on worldwide income, like citizens. Non-resident aliens are taxed only on US-source income and on income effectively connected with a US trade or business.

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 [SC2]. The 31-day current-year prong: physically present in the US for at least 31 days during the current calendar year. The 183-day weighted prong: present for at least 183 days across the three-year period ending with the current year, counting all current-year days, one-third of preceding-year days, and one-sixth of the year-before-that's days.

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 = 183 weighted days. That filer meets SPT and is a resident alien despite never crossing 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. Days in US possessions (Puerto Rico, Guam) generally do not count for SPT purposes.

A non-citizen who meets the SPT can override the resident-alien result via Closer Connection Exception (Form 8840) if present fewer than 183 days in the current year, has a tax home in a foreign country, and has a closer connection to that foreign country. Alternatively, treaty tie-breaker rules in the residence article (Article 4) of US bilateral tax treaties determine residency, filed via Form 8833. The treaty tie-breaker overrides SPT but does NOT relieve the filer from US worldwide-income reporting (the saving clause preserves US taxation of US persons).

What is the Foreign Earned Income Exclusion?

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 [SC3]. The cap is per qualifying filer; MFJ where both spouses qualify can exclude up to USD 260,000 combined. Adjusted annually by Rev. Proc. 2024-40 for inflation.

Two tests must be met: tax home in a foreign country, AND either bona-fide residence (resident of one or more foreign countries for an uninterrupted period that includes an entire tax year) OR physical presence (present in foreign countries for at least 330 full days during any 12-consecutive-month period). Foreign-earned income is wages, salary, and self-employment income for services performed in a foreign country — not passive income (interest, dividends, capital gains, rental income), pension distributions, or amounts paid by the US government.

The election is on Form 2555. The housing exclusion (employee) or housing deduction (self-employed) under IRC §911(c) covers reasonable housing expenses above a base amount (16 percent of FEIE cap, USD 20,800 for 2025) up to a city-varying cap. London, Hong Kong, Tokyo, Singapore, Geneva, and Zurich have elevated housing caps reflecting higher cost of living.

FEIE election decisions are sticky: a filer who revokes the election cannot re-elect for five years without IRS consent under Rev. Rul. 90-77. Failure to file timely can be deemed a failure to elect, foreclosing the exclusion for that year. FEIE does NOT exclude income from self-employment (SE) tax — SE tax runs on worldwide self-employment earnings.

How does the Foreign Tax Credit 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 [SC4]. 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 Schedule 3 of Form 1040 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 (wages above the cap, passive income). The FTC-vs-FEIE choice typically depends on the foreign jurisdiction's tax rate:

• High-tax country (Germany, France, UK, Australia, Japan, Belgium): FTC usually better because foreign tax often exceeds US tax on the same income.
• Low-tax country (UAE, Singapore, Hong Kong, Bahamas): FEIE usually better because there is little foreign tax to credit.
• Mid-tax country depends on income mix; modeling both paths is common.

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, FATCA, and foreign account reporting

The Report of Foreign Bank and Financial Accounts (FBAR), filed on FinCEN Form 114, is required for any US person with aggregate foreign account balances exceeding USD 10,000 at any point during the calendar year [SC5]. Filed electronically with FinCEN, not the IRS, separate from the federal income tax return. Reportable accounts include bank, securities, mutual fund, certain insurance with cash value, and (per FinCEN Notice 2020-2) eventually crypto exchange accounts on foreign platforms (the FBAR-crypto amendment has not been promulgated as of mid-2026).

Filing deadline is April 15 with automatic extension to October 15. Late filing carries non-wilful penalty up to USD 16,000 per violation and wilful penalty up to the greater of USD 161,000 or 50 percent of account balance.

Form 8938 (Statement of Specified Foreign Financial Assets), filed with Form 1040, has materially higher thresholds: USD 50,000 year-end / USD 75,000 anytime for US-resident single filers, USD 100,000 / USD 150,000 for US-resident MFJ. Filers living abroad have USD 200,000 / USD 300,000 (single) or USD 400,000 / USD 600,000 (MFJ) thresholds. Form 8938 covers a broader asset universe than FBAR — any specified foreign financial asset including foreign stock and partnership interests beyond bank accounts.

Streamlined Filing Procedures for delinquent expat filers

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]. Two streams:

• Streamlined Foreign Offshore Procedures (SFOP): For US persons living abroad. No civil FBAR penalty, no failure-to-file penalty, no accuracy-related penalty. Filing requirement: past three years of federal returns (or amendments), six years of FBARs, Form 14653 non-wilfulness certification.
• Streamlined Domestic Offshore Procedures (SDOP): For US persons living in the US. Civil FBAR penalty of 5 percent of the highest aggregate foreign account balance during the past six years. Same return / FBAR filing requirement plus Form 14654 certification.

Non-wilfulness certification is the crux of the program. Filers who cannot credibly certify non-wilfulness should consult counsel about the alternative paths. The Delinquent FBAR Submission Procedures (DFSP) and Delinquent International Information Return Submission Procedures (DIIRSP) cover narrower cases.

For the full detail of US expat tax mechanics including PFIC reporting for foreign mutual funds and expatriation tax under IRC §877A, see the Expat tax residency crossover. The Tax treaty relief crossover covers Form 8833 disclosure and saving-clause mechanics. The US federal tax overview covers the full federal stack. To find a credentialed expat-tax practitioner, browse the US tax-pros directory.