IRS Q&A: Tax Obligations of U.S. Individuals Living and Working Abroad
- Viktoriya Barsukova, EA, MBA
- 4 days ago
- 9 min read
This session gathered senior IRS specialists and counsel to address real-world expat tax issues—residency, the foreign earned income exclusion (FEIE), foreign housing, elections and revocations, employment/self-employment taxes, totalization agreements, FBAR/FATCA, and special fact patterns (cruise ships, pilots, short assignments, spouses).
Meet the Panel
IRS Q&A: Tax Obligations of U.S. Individuals Living and Working Abroad
Bethany Krause — Senior Revenue Agent, LB&I (International Individual / IIC)
Focused on residency status and FEIE. Regular instructor for IRS internal training and external audiences. Known for clear explanations of bona fide residence vs. physical presence and practical filing mechanics (Form 2555, worksheets, timing).
Cathy Bishop — Senior Revenue Agent, LB&I (International / IIC)
15+ years at IRS. Expertise includes residency status, FEIE, U.S. territories, and employees of foreign governments/international organizations. B.S. in Accounting (minor in Computer Technology) and M.S. in Accounting & Taxation.
Emma Sadikovich — Senior Revenue Agent, LB&I
Specializes in FEIE, expatriation, and U.S. territories issues. CPA (inactive). Holds a B.B.A. (Accounting/Finance), Master of Accounting, and J.D. Frequently addresses “accidental American” and filing-obligation questions.
Lindsey Stellwagen — Special Counsel, SDSC (International Litigation & Advisory)
IRS legal counsel advising on international litigation and technical positions. Brings a litigation lens to FEIE elections, tax home, principal place of business, remote-work risks, late elections, and treaty disclosures.
Complete Q&A Transcript
Q1. Do U.S. citizens and residents abroad have to report worldwide income?
Answer (Cathy Bishop): Yes. U.S. citizens and residents must report all worldwide income unless a specific Code or treaty provision exempts it. You generally must file Form 1040 even while living abroad, and you may also owe employment taxes (FICA for employees; SECA for self-employed).
Authority: IRC §§1 and 61.
Practice tip: Don’t assume “I live abroad, so I don’t file.” File annually and then apply exclusions/credits as appropriate.
Q2. What income qualifies for the Foreign Earned Income Exclusion (FEIE)?
Answer (Bethany Krause): FEIE covers compensation for services performed in a foreign country—wages, salaries, and self-employment income. It doesn’t include:
Pay earned in U.S. territories, Antarctica, or international waters/airspace (those aren’t “foreign countries” for §911).
U.S. government civilian/military pay (always U.S.-source).
Pensions/annuities/Social Security, or deferred pay received after the year following the services.
Meals/lodging excluded for employer convenience.
Form: Claim on Form 2555.
Authority: IRC §911(b).
Benefit: Qualifiers can exclude up to $126,500 (2024) or $130,000 (2025) per person.
Q3. What is a “foreign tax home,” and how is “abode” determined?
Answer (Cathy Bishop): Your tax home is your main place of business/post of duty abroad. But abode—where your strongest economic, family, and personal ties are—must not be in the U.S. (outside combat-zone exceptions after 2017). You can maintain a U.S. dwelling and still have a foreign abode, but facts (ties) control.
Authority: IRC §911(d)(3); Treas. Reg. §1.911-2(b).
Case lens: Sochurek v. Commissioner addresses factors courts weigh.
Remote-work alert: If you live overseas but are only authorized to conduct business in the U.S., IRS can treat the U.S. as your principal place of business—you’ll fail the tax-home test.
Q4. What is the Bona Fide Residence Test?
Answer (Bethany Krause): It’s subjective. You must be a U.S. citizen or a U.S. resident who is a citizen/national of a treaty country, and be a bona fide resident of a foreign country for an uninterrupted period including a full tax year. Length of stay alone isn’t enough; courts apply 11 factors (intent, assimilation, reasons for absences, etc.) from Sochurek(1962).
When it fits: Long-term, “lock-stock-and-barrel” life abroad.
Q5. What is the Physical Presence Test?
Answer (Bethany Krause): It’s objective: be physically present in foreign country(ies) 330 full days (midnight-to-midnight) in any 12 consecutive months (period can start any day).
Waiver: Time can be waived if you had a foreign tax home and adverse conditions (war/civil unrest) forced departure; countries/dates are listed annually in the Internal Revenue Bulletin.
Reality check: If you can’t meet this day count, you’ll very likely also fail bona fide residence (which is a higherbar).
Q6. How do I compute my U.S. tax when I claim FEIE?
Answer (Bethany Krause): Use the Foreign Earned Income Tax Worksheet. It taxes your non-excluded income at the marginal rate you would have had without the exclusion (no bracket “step-down”).
Form path: Form 1040 → use the FEI worksheet in the instructions.
Important: You must file even if your earnings are below the FEIE limit—the election isn’t automatic.
Q7. What are the elections for FEIE and foreign housing—and how do revocations work?
Answer (Bethany Krause): FEIE and foreign housing exclusion/deduction are two separate elections on Form 2555. You can claim one now and add the other later, or both at once. Once elected, they remain in effect until revoked.
Deemed revocation: If you claim the Foreign Tax Credit (FTC) on income that could have been excluded, you’ve revoked FEIE.
Five-year rule: After revocation, you can’t re-elect FEIE for 5 years unless IRS approves via private letter ruling(PLR).
Timing: Make elections on a timely return (with extensions), on an amended return within IRC §6511(a) claim limits, or on a late return filed within 1 year of the original due date (specific Reg relief applies).
Q8. Can I combine FEIE and the Foreign Tax Credit (FTC)?
Answer (Cathy Bishop): Yes—not on the same dollars. Example for 2025: earn $150,000, exclude $130,000 FEIE → $20,000 remains. If you paid $35,000 foreign tax, your allowable FTC is $35,000 × (20,000 ÷ 150,000) = $4,667 on Form 1116. You must fully apply FEIE first, then take FTC on unexcluded income (or on foreign unearned income like dividends/interest).
Q9. FEIE vs. FTC—which is better?
Answer (Emma Sadikovich): It depends on facts. In low- or no-tax jurisdictions, FEIE (and possibly housing) typically wins. In high-tax countries, the FTC (alone or combined with FEIE on excess income) is often more valuable. Run both scenarios—remember the five-year FEIE re-election bar after revocation.
Q10. Does the physical presence test apply to a non-working spouse?
Answer (Cathy Bishop): Form 2555 is individual. If only one spouse has foreign earned income, only that earner must meet bona fide residence or physical presence. If both spouses have foreign earned income, each must independently qualify and file a Form 2555.
Q11. How is foreign unemployment reported?
Answer (Bethany Krause): For 2024, report on Schedule 1, line 8Z (Other income); it flows to Form 1040, line 8. (Line references can change year-to-year—check current instructions.)
Q12. Are Social Security benefits and pensions considered earned income for FEIE?
Answer (Cathy Bishop): No. Earned income is wages, salaries, and professional fees for services. Social Security and pensions aren’t earned income and can’t be excluded under FEIE. Their taxability depends on 1040 rules and, sometimes, treaties.
Q13. Is employer-provided housing eligible for the housing exclusion?
Answer (Cathy Bishop): Yes—if you otherwise qualify. Employer-paid housing can count toward the foreign housing exclusion/deduction on Form 2555 (above the base amount, subject to local caps).
Q14. What if I’m on a one-year assignment abroad—can I qualify?
Answer (Bethany Krause): It’s unlikely you’ll establish a foreign tax home in just one year because your abode(strongest family/economic ties) usually remains in the U.S. You might meet physical presence (330 days), but failing tax-home means no FEIE. It’s fact-specific, but tread carefully.
Q15. How does FEIE work for cruise-ship or airline workers?
Answer (Bethany Krause): International waters/airspace are not foreign countries. Only services performed under a foreign government’s jurisdiction (within 12 nautical miles of shore) count. You must allocate income by days/locations. Many crew can’t reach 330 full foreign days or have too little qualifying income.
Q16. What employment taxes apply abroad—FICA and SECA?
Answer (Emma Sadikovich):
FICA (Social Security/Medicare) applies to wages of U.S. citizens/residents working abroad for an American employer as defined in IRC §3121(h) (U.S. corp; U.S. resident individual; partnership with ≥⅔ U.S. resident partners; trust with all U.S. trustees; U.S. government), and in some cases for certain foreign affiliates or foreign persons treated as American employers under §3121(c).
SECA applies to self-employed U.S. persons with ≥ $400 net earnings—regardless of FEIE or residence.
Critical point: FEIE does not eliminate FICA/SECA.
Q17. Can totalization agreements relieve FICA/SECA? Which taxes do they impact?
Answer (Bethany Krause): Yes. Totalization agreements prevent double Social Security taxation. Under a qualifying agreement, you may not owe FICA (employees) or SECA (self-employed) to the U.S. when covered by the foreign system.
Poll slide answer: The correct choice was “Both b and c”—FICA and SECA may not be due under a totalization agreement.
Authority: IRC §§3101(c), 3111(c), 1401(c).
Q18. How do I document a totalization exemption?
Answer (Bethany Krause):
Employees: You or your employer obtain a certificate of coverage from the foreign authority (or from SSA if the foreign authority won’t issue). Employer keeps it on file.
Self-employed: Request the certificate from the foreign agency; if unavailable, request a statement from SSA.
Attach the certificate/statement to your U.S. tax return each year.
Write “Exempt, see attached statement” on the self-employment tax line (for 2025 draft: Schedule 2, Part II, line 4).
Q19. What is the FBAR rule—and is physical gold/cash reportable?
Answer (Bethany Krause): File FinCEN Form 114 (FBAR) if the aggregate value of foreign financial accountsexceeds $10,000 at any point in the year. It’s filed with FinCEN, not the IRS, electronically. Due April 15 with an automatic extension to Oct 15.
Not reportable on FBAR: Physical gold/silver or cash stored at home (FBAR covers accounts, not tangible assets).
Site: FinCEN.gov.
Q20. Beyond FBAR, what other information returns might I need?
Answer (Bethany Krause): Depending on facts, consider: Form 8938 (FATCA); Forms 3520/3520-A (foreign trusts/foreign gifts); Form 8621 (PFIC); Form 5471 (certain foreign corps); Form 926 (transfers to foreign corps); Form 8865 (foreign partnerships); Form 8858 (foreign disregarded entities/branches); Form 8854 (expatriation). Penalties for failure can be severe; review thresholds and ownership tests.
Q21. If my foreign earnings are below the FEIE limit, do I still have to file?
Answer (Bethany Krause): Yes. FEIE is an election—if you don’t file Form 1040 + Form 2555, IRS can deny the exclusion and tax the income. Filing starts the statute of limitations clock.
Q22. What about late elections, nonfilers, and reliance on a preparer?
Answer (Lindsey Stellwagen): If you don’t file, the statute never starts; the IRS can assess at any time. FEIE/housing are not automatic—you must elect them. Courts (see Boyle) hold that responsibility to file can’t be delegated; preparer failure is not a defense. Treas. Reg. §1.911-7 provides limited relief for late §911 elections, but timing and IRS contact matter. File now and consider engaging a qualified international tax pro.
Q23. Can you point me to the treaties page quickly?
Answer (Cathy Bishop): Yes—search “IRS treaties A to Z.” The IRS site lists all income tax treaties by country with links.
Q24. What counts as a brief absence for bona fide residence?
Answer (Bethany Krause): Short trips—e.g., a week or two for holidays, a wedding, maybe even a one-week vacation—are typically brief/temporary. But repeated, lengthy absences (e.g., 30-days-on/30-days-off back in the U.S.) are notbrief and can undermine bona fide residency.
Q25. Any situations where a Form 1040 isn’t required?
Answer (Bethany Krause): Yes—if your income is below filing thresholds (e.g., very low Social Security). But expats must verify carefully; even when a 1040 isn’t required, FBAR/FATCA or entity forms might still be.
Q26. A U.S. citizen born in the U.S. moved abroad and never returned—must they file?
Answer (Emma Sadikovich): Yes. They’re still U.S. citizens (“accidental Americans”) and subject to worldwide taxation and U.S. filing obligations.
Q27. We had unfiled years (e.g., 2011–2014 in Ireland) because the preparer failed. Can we still fix it?
Answer (Lindsey Stellwagen, with Bethany Krause agreeing): You should file. Reliance on a preparer doesn’t excuse failure to file (Supreme Court). The IRS can pursue unfiled years indefinitely; filing starts the statute and allows you to elect FEIE. For late §911 elections, follow the Treas. Reg. §1.911-7 procedures and explicitly state the filing is under that Reg; relief can be lost if IRS contacts you first. If tax is due, penalties/interest may apply; engage a qualified international preparer.
Q28. If I repatriate and then go abroad 10 years later, what happens to my FEIE election?
Answer (Cathy Bishop): Your original FEIE election remains until revoked. If you later choose FTC (Form 1116) on income that could be excluded, that’s a revocation and you can’t re-elect FEIE for 5 years without IRS consent (PLR).
Q29. If my income exceeds FEIE, can I also take the housing exclusion?
Answer (Bethany Krause): Yes—provided you have foreign earned income above the FEIE cap and qualifying housing expenses. Claim both on Form 2555. If all income is already excluded by FEIE, there’s nothing left to absorb housing.
Q30. Where exactly do I write “Exempt, see attached statement” for totalization?
Answer (Bethany Krause): Write it on the self-employment tax line. For 2025 (draft) that’s Schedule 2, Part II, line 4. Attach the certificate/statement each year.
Q31. Are there IRS resources and recordings to learn more?
Answer (Bethany Krause / Cathy Bishop): Yes—Publication 54, IRS International Taxpayers pages, SSA’s Totalization country list, and IRS Practice Units (tax home, physical presence, bona fide residence, FEIE computations, housing, elections, employment/SECA). IRS webinars (e.g., foreign tax credit next week; prior ones on consular employees and residency/§6013(g) joint election) are typically posted to the IRS YouTube channel.
Closing Themes from the Panel
IRS Q&A: Tax Obligations of U.S. Individuals Living and Working Abroad
Always file. FEIE/housing/treaty benefits are elections—no filing, no benefit. Filing also starts the statute.
Document everything. Presence days, tax-home facts, housing expenses, and totalization certificates of coverage.
Plan elections. FEIE vs. FTC is jurisdiction-specific. Revoking FEIE triggers a five-year re-election bar (absent PLR).
Mind FBAR/FATCA/entity forms. Income tax is only part of expat compliance; information returns carry heavy penalties.
Remote-work & mobile professions. Principal place of business and “foreign country” definitions can defeat FEIE—pilots/cruise staff often need careful allocation.
The Q&A content included has been restored and documented with my interpretation following the training session. While every effort has been made to capture the substance accurately, the material should not be considered a verbatim transcript.
IRS Q&A: Tax Obligations of U.S. Individuals Living and Working Abroad
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