The United States is one of only two countries in the world (the other is Eritrea) that taxes its citizens on worldwide income regardless of where they live. A U.S. citizen living in Germany, working for a German employer, and paying German taxes still has a U.S. filing obligation — and potentially a U.S. tax liability.

But the tax code provides significant relief mechanisms for Americans abroad: the foreign earned income exclusion (FEIE), the foreign tax credit (FTC), and the foreign housing exclusion. Used correctly, these provisions can eliminate most or all of the U.S. tax on foreign-source income. Used incorrectly — or not at all — they leave Americans abroad paying double tax.

U.S. citizens and resident aliens must file a U.S. income tax return if their gross income exceeds the applicable filing threshold, regardless of where they live or where the income is earned.

For 2026, the filing thresholds are:

• Single: $14,600
• Married filing jointly: $29,200
• Self-employed: $400 (net self-employment income)

These thresholds apply to worldwide income — not just U.S.-source income. A U.S. citizen living in Japan with $50,000 of Japanese employment income must file a U.S. return.

The filing deadline for taxpayers abroad is automatically extended to June 15 (two months after the standard April 15 deadline). An additional extension to October 15 is available by filing Form 4868. Interest accrues from April 15 on any unpaid tax, even if the filing deadline is extended.

The foreign earned income exclusion (FEIE) allows qualifying U.S. citizens and resident aliens to exclude a portion of their foreign earned income from U.S. gross income.

For 2026, the FEIE maximum is $126,500 (indexed for inflation). This means a qualifying taxpayer can exclude up to $126,500 of foreign wages, salaries, and self-employment income from U.S. taxable income.

Foreign earned income includes wages, salaries, professional fees, and other compensation for personal services performed in a foreign country. It does not include:

• Passive income (dividends, interest, capital gains, rents);
• Pension and retirement income;
• Amounts paid by the U.S. government to its employees;
• Amounts received after the end of the tax year following the year in which the services were performed; or
• Amounts excluded under another provision of the Code.

To claim the FEIE, the taxpayer must meet either the bona fide residence test or the physical presence test.

Bona Fide Residence Test The taxpayer must be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. Bona fide residence is determined based on the taxpayer's intent, the nature of the stay, and the circumstances of the residence — not simply the number of days spent in the foreign country.

Factors indicating bona fide residence include:

• Establishing a permanent home in the foreign country;
• Bringing family members to the foreign country;
• Participating in the social and community life of the foreign country;
• Paying foreign income taxes; and
• Intending to remain in the foreign country indefinitely.

Physical Presence Test The taxpayer must be physically present in a foreign country (or countries) for at least 330 full days during any consecutive 12-month period. The 12-month period does not have to coincide with the tax year.

The physical presence test is more mechanical than the bona fide residence test — it is based solely on the number of days in a foreign country, not on intent or the nature of the stay. Days in transit through a foreign country generally do not count.

The FEIE is claimed on Form 2555. The election is made by filing Form 2555 with the return. Once made, the election remains in effect for all subsequent years unless revoked.

If the taxpayer revokes the FEIE election, the taxpayer cannot re-elect the exclusion for five years without IRS consent.

In addition to the FEIE, qualifying taxpayers may exclude or deduct foreign housing costs that exceed a base amount. The housing exclusion is claimed on Form 2555 along with the FEIE.

The housing exclusion covers reasonable housing expenses — rent, utilities, insurance, and similar costs — paid with employer-provided amounts. Self-employed taxpayers may deduct (rather than exclude) housing costs.

The base amount for 2026 is $19,200 (16% of the FEIE maximum). Housing costs above the base amount, up to a location-specific maximum, are excludable.

The foreign tax credit (FTC) allows U.S. taxpayers to offset their U.S. tax liability by the amount of foreign income taxes paid or accrued on foreign-source income.

The FTC is claimed on Form 1116 (for individuals) or Form 1118 (for corporations). It is available for:

• Foreign income taxes paid directly by the taxpayer;
• Foreign income taxes withheld at source; and
• Foreign income taxes paid through a foreign corporation (indirect credit, for corporations).

The FTC is limited to the U.S. tax attributable to foreign-source income. The limitation is calculated separately for different baskets of income:

• General basket — most foreign income;
• Passive basket — dividends, interest, rents, and royalties;
• Foreign branch basket — income of a foreign branch of a U.S. corporation; and
• Other baskets — various specialized categories.

Excess FTCs (credits that exceed the limitation) can be carried back one year and carried forward ten years.

A taxpayer cannot claim both the FEIE and the FTC on the same income. Income excluded under the FEIE is not eligible for the FTC.

The choice between the FEIE and the FTC depends on the taxpayer's specific situation:

• High-tax countries: The FTC is generally more beneficial when the foreign tax rate exceeds the U.S. rate. The FTC offsets U.S. tax dollar-for-dollar; the FEIE only excludes income up to the maximum.
• Low-tax countries: The FEIE is generally more beneficial when the foreign tax rate is lower than the U.S. rate, because the FEIE eliminates U.S. tax on the excluded income without requiring a dollar-for-dollar foreign tax offset.
• Self-employment: Self-employed taxpayers who claim the FEIE still owe U.S. self-employment tax on excluded income. The FTC does not reduce self-employment tax.

U.S. citizens abroad with foreign financial accounts must also comply with FBAR and FATCA reporting requirements:

• FBAR (FinCEN Form 114): Required if aggregate foreign account balances exceed $10,000 at any point during the year;
• Form 8938 (FATCA): Required if specified foreign financial assets exceed the applicable threshold (higher thresholds apply for taxpayers living abroad).

See our guides on FBAR filing and FATCA and Form 8938 for details.

U.S. citizens abroad who have not been filing U.S. returns may be eligible for the Streamlined Foreign Offshore Procedures — an IRS program that allows non-willful non-filers to come into compliance by filing three years of returns and six years of FBARs, with no penalty.

The streamlined procedures are not available for willful failures. Taxpayers who knowingly failed to file face the full penalty regime.

U.S. citizens living abroad face a complex web of filing obligations, exclusions, credits, and reporting requirements. The FEIE, the FTC, and the housing exclusion can dramatically reduce or eliminate U.S. tax on foreign-source income — but only if they are claimed correctly and the underlying qualification tests are met.

If you are a U.S. citizen living abroad and need help with your U.S. tax obligations, contact us for a consultation. Our team has extensive experience with expat taxation and international tax planning.

Governing authority: IRC §§901, 904, 911; Treas. Reg. §§1.911-1 through 1.911-7; Form 2555; Form 1116; IRS Publication 54 (Tax Guide for U.S. Citizens and Resident Aliens Abroad).

Related: FBAR Filing Guide · FATCA and Form 8938 · Remote Work and Digital Nomad Taxes