Tax Obligations of U.S. Individuals Living and Working Abroad
- Viktoriya Barsukova, EA, MBA
- 4 days ago
- 5 min read
The United States is one of the few countries that taxes its citizens and residents on worldwide income, no matter where they live.
That creates both complexity and opportunity. If you’re working outside the U.S., you still have to file a U.S. tax return — but you may be able to claim exclusions, deductions, and credits that reduce or even eliminate U.S. tax.
This guide explains how the rules work in plain English, with practical notes for tax professionals (forms, schedules, line numbers, and code references).
Reporting Worldwide Income
If you are a U.S. citizen or resident, you must report and pay U.S. tax on all income — U.S. and foreign — unless specifically exempt under the Internal Revenue Code (IRC) or a tax treaty.
Form 1040 is required, even for expats.
Authority: IRC §§1, 61.
Employment taxes may also apply (see FICA/SECA below).
Foreign Earned Income Exclusion (FEIE)
The FEIE allows you to exclude a significant portion of your foreign earned income.
Exclusion amount: $126,500 for 2024; $130,000 for 2025 (indexed for inflation).
What it covers: Wages, salaries, or self-employment income for services performed in a foreign country.
What it does not cover:
U.S. government pay (civilian or military),
Pensions/annuities, Social Security benefits,
Income from U.S. territories, Antarctica, or international waters/airspace,
Deferred pay received after the year following the services,
Meals/lodging excluded for employer convenience.
Form: Claim the exclusion on Form 2555, attached to Form 1040.
Authority: IRC §911.
Requirements to Claim FEIE
To qualify, you must:
Have foreign earned income.
Have a foreign tax home.
Meet either the bona fide residence test or the physical presence test.
Make a valid election by filing Form 2555.
Tax Home Test
Your tax home is your main place of business, post of duty, or regular place of work in a foreign country.
Courts distinguish “tax home” from “abode.” Abode refers to where your strongest family, economic, and personal ties are.
If your abode remains in the U.S., you usually fail the test (except for U.S. military in combat zones after 2017).
Remote work caution: If you live abroad but are only authorized to conduct business in the U.S., your principal place of business is the U.S., and you fail the test.
Authority: IRC §911(d)(3); Treas. Reg. §1.911-2(b); Sochurek v. Commissioner, 300 F.2d 34 (7th Cir. 1962).
Bona Fide Residence Test
For U.S. citizens, or U.S. residents who are citizens/nationals of a treaty country.
Must be a resident of a foreign country for an uninterrupted period that includes a full tax year.
It’s a subjective test, judged on intent, length of stay, assimilation into foreign society, and reasons for absences.
Courts apply the 11 Sochurek factors.
Physical Presence Test
Must be physically present in foreign country(ies) for at least 330 full days (midnight-to-midnight) in any 12 consecutive months.
The 12-month period can begin on any day.
Waiver: Time requirement may be waived if you had a tax home abroad but had to leave due to war, civil unrest, or adverse conditions. Qualifying countries/dates are published in the Internal Revenue Bulletin.
Elections and Revocations
To claim FEIE, you must elect it by filing Form 2555.
The foreign housing exclusion/deduction is a separate election (also made on Form 2555). You may claim one or both.
Once elected, they remain in place until revoked.
Revocation rules:
Choosing the Foreign Tax Credit (Form 1116) instead of FEIE on income you could exclude is a deemed revocation.
Once revoked, you cannot re-elect FEIE for five years without IRS approval (via a private letter ruling).
Timing:
Election must be made on a timely return (with extensions),
Or on an amended return within the IRC §6511(a) claim period,
Or on a late return filed within one year of the original due date.
Relief for late elections is possible under Treas. Reg. §1.911-7, but only if the IRS hasn’t contacted you yet.
Employment Taxes Abroad
Even if you qualify for FEIE, you may still owe Social Security and Medicare taxes.
FICA (employees): Applies if wages are paid by an American employer — defined in IRC §3121(h) as a U.S. corporation, a U.S. resident individual, a partnership with ≥⅔ U.S. resident partners, a trust with all U.S. trustees, or the U.S. government. It may also apply to employees of foreign affiliates covered under §3121(c).
SECA (self-employed): Applies to U.S. citizens/residents with net earnings of $400 or more, regardless of residence or FEIE. Form: Schedule SE, attached to Form 1040.
Authority: IRC §§3101, 3111, 3121 (FICA); §1401 (SECA).
Totalization Agreements
Totalization agreements prevent double Social Security taxation when a U.S. citizen/resident works in a country with its own system.
If your income is covered by the foreign system, you may be exempt from U.S. Social Security/Medicare.
Employees: You or your employer must obtain a certificate of coverage from the foreign agency (or from the U.S. SSA if the foreign authority won’t issue). Employer keeps it on file.
Self-Employed: Must attach certificate to the return and write “Exempt, see attached statement” on the self-employment tax line (Schedule 2, Part II, line 4 for draft 2025).
Authority: IRC §§3101(c), 3111(c), 1401(c).
Information Returns
In addition to Form 1040, expats may need to file information returns.
FBAR (FinCEN Form 114): File electronically with FinCEN if aggregate value of foreign accounts exceeds $10,000 at any time. Due April 15, with automatic extension to October 15. Not filed with IRS.
Form 8938 (FATCA): Statement of specified foreign financial assets.
Other possible forms:
Form 3520/3520-A (foreign trusts, certain foreign gifts),
Form 5471 (U.S. persons with certain foreign corporations),
Form 8865 (foreign partnerships),
Form 8858 (foreign disregarded entities/branches),
Form 8621 (PFICs),
Form 926 (transfers to foreign corps),
Form 8854 (expatriation).
Penalties: Many of these forms carry penalties starting at $10,000 per form, per year.
Filing Requirements and Statute of Limitations
Filing a return is critical — even if income is below the FEIE limit or tax due is zero.
Why: Filing preserves your right to the exclusion/credits and starts the statute of limitations. Without a return, the IRS can audit indefinitely.
FEIE election: Lost if no timely return filed. Relief possible under Treas. Reg. §1.911-7, but limited.
Court precedent: United States v. Boyle, 469 U.S. 241 (1985) — reliance on a preparer is not a defense for failure to file.
Tricky Scenarios for Expats
Some situations don’t fit neatly into the main rules but come up often:
Accidental Americans: U.S. citizens by birth owe U.S. tax even if they never lived in the U.S. again.
Cruise Ship/Airline Workers: Work in international waters/airspace is not FEIE-eligible. Only work under a foreign government’s jurisdiction (within 12 nautical miles of shore) counts. Income must be allocated.
One-Year Assignments: Usually fail the tax home test; abode generally remains in the U.S. Physical presence may work, but facts are key.
Employer-Provided Housing: Housing paid by employer can qualify for the housing exclusion if requirements are met (Form 2555).
Physical Gold or Cash: Not reportable on FBAR. FBAR applies only to financial accounts, not tangible assets.
Resources
IRS Publication 54: Tax Guide for U.S. Citizens and Resident Aliens Abroad.
IRS International Taxpayers Page: irs.gov/Individuals/International-taxpayers
Totalization Agreements: ssa.gov/international/agreement_descriptions.html
IRS Practice Units: On tax home, physical presence, bona fide residence, FEIE, housing, elections, and employment/self-employment taxes.
Taxpayer Assistance Numbers: U.S. 1-800-829-1040; Abroad +1 515-564-6827.
Conclusion
Tax Obligations of U.S. Individuals Living and Working Abroad
The U.S. system for taxing citizens abroad is strict — but it offers powerful tools like the FEIE, foreign housing exclusion, FTC, and totalization agreements to avoid double taxation. The key is timely filing, making proper elections, and complying with information return rules.
👉 Want to see how IRS specialists answered the toughest real-life expat questions? Read the full Q&A here:
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