So, you finally did it. You packed the bags, snagged a digital nomad visa, and moved to a sun-drenched cafe in Lisbon or a sleek high-rise in Tokyo. Life is great until April rolls around and that nagging thought hits: Do US citizens need to pay taxes when living abroad?
Honestly, the short answer is usually "yes," but the actual bill you owe might be zero. It's weird, I know. The United States is one of only two countries (shoutout to Eritrea) that taxes based on citizenship rather than where you actually live. If you hold that blue passport, Uncle Sam wants to know about every penny you make, whether it’s in Dollars, Euros, or Yen.
But don't panic. Just because you have to file doesn't mean you'll actually be writing a check to the IRS. There are massive loopholes—legitimate ones—designed specifically to stop you from getting taxed twice on the same dollar.
The Reality of Citizenship-Based Taxation
Most people think that if they don't step foot on US soil for 365 days, they’re off the hook. Nope. If you’re a US citizen or a Green Card holder, you are taxed on your worldwide income.
It doesn't matter if your boss is French, your bank is in Zurich, and your office is a beach in Bali. If you earn it, the IRS wants to see the paperwork. This includes wages, interest, dividends, and even that side hustle selling ceramics on the weekends.
🔗 Read more: Is The Housing Market About To Crash? What Most People Get Wrong
The $132,900 Lifeline
For the 2026 tax year, the IRS handed out a pretty decent gift. The Foreign Earned Income Exclusion (FEIE) has jumped to $132,900. Basically, if you earn less than that amount and you meet certain residency tests, you can essentially "erase" that income from your US tax return.
You’ve got two ways to qualify for this:
- The Physical Presence Test: You need to be outside the US for 330 full days in any 12-month period. It’s a strict "butt-in-seat" rule. If you fly back for a two-week wedding and stay a few days extra, you might accidentally blow your eligibility.
- The Bona Fide Residence Test: This is more about your intent. If you’ve moved to London indefinitely, have a local lease, and pay local taxes, you’re likely a bona fide resident.
Do US Citizens Need To Pay Taxes When Living Abroad If They Already Pay Local Taxes?
This is where the Foreign Tax Credit (FTC) comes into play. If you live in a high-tax country—think Belgium, Germany, or Japan—you’re probably already paying a hefty chunk to the local government.
The FTC allows you to take the taxes you paid to your host country and apply them as a dollar-for-dollar credit against what you owe the US. If you paid $20,000 in taxes to the UK and your US bill would have been $15,000, you owe the US nothing. In fact, you might even be able to carry those extra credits forward to future years.
💡 You might also like: Neiman Marcus in Manhattan New York: What Really Happened to the Hudson Yards Giant
Choosing Between the FEIE and FTC
It’s not always obvious which one to pick. Honestly, it gets complicated.
- Low-Tax Countries: If you’re in Dubai or Singapore, the FEIE is usually your best friend because there aren't enough local taxes to use as credits.
- High-Tax Countries: In Europe, the FTC is often better. Why? Because using the FTC allows you to still contribute to a Roth IRA and claim child tax credits, which the FEIE can sometimes block.
- The Hybrid Approach: You can actually use both, but not on the same dollar. You might exclude your salary with the FEIE and then use the FTC to offset taxes on your investment dividends.
The "Hidden" Forms That Get People Arrested (Or Just Heavily Fined)
The tax return itself (Form 1040) is usually the easy part. The real danger for expats lies in disclosure forms. The IRS is way more aggressive about you "hiding" money than they are about the actual tax amount.
The FBAR (FinCEN Form 114)
If the total of all your foreign bank accounts—including pensions and investment accounts—hits $10,000 at any point during the year, you have to file an FBAR. Even if you only had $10,001 for five minutes because you were moving money between accounts, you have to report it. The penalties for "forgetting" this one are legendary. We're talking $10,000 per violation or more.
FATCA (Form 8938)
This is like the FBAR’s bigger, meaner brother. It’s for people with higher assets (usually over $200,000 for singles living abroad). Thanks to the Foreign Account Tax Compliance Act, most foreign banks now report US account holders directly to the IRS. They already know you're there.
📖 Related: Rough Tax Return Calculator: How to Estimate Your Refund Without Losing Your Mind
What If I Haven't Filed in Years?
Maybe you didn't know. Maybe you've lived in Montreal since you were three and didn't realize your US birth certificate came with a tax bill. You aren't alone.
The IRS has a "get out of jail free" card called the Streamlined Foreign Offshore Procedures.
If your failure to file was "non-willful" (meaning you genuinely didn't know), you can usually catch up by filing the last three years of tax returns and six years of FBARs. The best part? They often waive the massive late-filing penalties. It’s a peace-of-mind play that every "accidental American" should look into.
Key Deadlines for 2026
- April 15: The date your payment is due (even if you live abroad).
- June 15: The automatic extension deadline for expats to file their return.
- October 15: The final deadline if you request an additional extension.
Actionable Next Steps for Expats
Don't wait until June to start digging through your foreign bank statements. Tax season is a lot heavier when you're dealing with currency conversions and international mail.
- Track Your Days: Keep a log of every time you cross the US border. The Physical Presence Test is a math game; don't lose it because you forgot a weekend trip to New York.
- Convert Your Currency: Use the IRS-approved yearly average exchange rates to calculate your income. Don't just guess.
- Check Your Bank Balances: Look at the peak balance of every non-US account you own. If the aggregate is over $10,000, mark the FBAR on your calendar.
- Find a Specialist: A regular CPA in Ohio might be great for a local small business, but they will likely drown in expat forms. Look for someone who understands "Section 911" and treaty "Saving Clauses."
Living abroad is an adventure, but the IRS is the one travel companion you can't ghost. Get the paperwork right, and you can go back to enjoying that sunset without worrying about a certified letter from Austin, Texas, showing up in your mailbox.