Understanding the Taxation of American Citizens Living Abroad

The taxation of American citizens living abroad is one of the most complicated, misunderstood, and confusing aspects of moving to Europe from the U.S.A.

Between citizenship-based taxation, parsing the nuances of the tax treaty between the U.S. and your host country (where it exists), and finding trusted expat advisors to work with, expatriate taxation involves a good deal of patience and perseverance.

In this article, we walk through how to think about managing U.S. expat taxes, starting with a crucial question: Do expats pay U.S. taxes? From there, we cover often-misunderstood filing thresholds, how to file, state taxes, helpful vocabulary for expat tax season, and more.

Let’s dig in.

So, do expats pay U.S. taxes?

Generally, U.S. expats are required to file an annual tax return with the IRS, however, in most cases, U.S. expats will not owe U.S. taxes.

“I thought I didn’t have to file unless I made more than like 100K.”

We hear this a lot; it’s actually a conflation with the Foreign Earned Income Exclusion (FEIE), an expat tax provision designed for U.S. taxpayers who can prove they live abroad (and so avoid owing U.S. taxes on their earned income). Hang onto that thought – we’ll come back to it.

First, let’s get into why you usually need to file a U.S. expat tax return every year, even if you make less than 100K: Unlike nearly every other country, the U.S. operates a citizenship-based taxation approach. In a nutshell, this means that your worldwide income is subject to U.S. taxation.

Generally, if you meet the following two tests, you are required to file a U.S. expat tax return:

You earn more than the minimum income threshold for your filing category (see below)
You are a U.S. citizen (includes dual U.S. citizenship holders), a permanent resident (green card holder), or a U.S.-connected person (e.g., a foreign entrepreneur with business dealings in the U.S.)

2026 U.S. Income Tax Filing Thresholds

The filing threshold varies depending on your status, but, as you’ll see, filing is typically required:

All figures noted are for the 2026 tax year. The age ranges refer to the age you were at the end of 2025. So, if you were 64 on December 31, 2025, and you file as a single filer, then your filing threshold would be $15,750.

How to file U.S. taxes from abroad

U.S. expat tax returns begin with a 1040. However, in most cases, when you’re tax resident in another country, you’ll need the completed foreign return to inform and guide the U.S. expat return. This applies regardless of whether you live in Switzerland, Germany, or another foreign country.

So, your first step when filing an expat tax return may be to file for an extension

As an expat, you likely have an automatic, two-month extension until June 15th. There may be some cases (such as if you own a business, or you moved mid-year, for example) when you’ll need to abide by the typical April 15th deadline, but for many individuals with straightforward returns, June 15th is the new deadline.

Additional extensions are available.

2026 Tax Deadlines

The table above assumes that the deadlines don’t fall on a weekend or a federal holiday. If they do, then the deadline becomes the next standard weekday.

Pro tip: All figures on your tax return must be converted into U.S. dollars. To do this, you can use the IRS yearly average currency exchange rates.

Types of income and why they matter

Earned income: refers to money received for work performed, such as wages or salaries.
Unearned income: the same thing as passive income, which refers to income gained through investments, interest, foreign rental properties, and retirement distributions, among others.

The type of income you have matters hugely because it impacts your filing strategy, including how you use two common expat tax filing provisions that we compare in this article: The Foreign Earned Income Exclusion vs the Foreign Tax Credit.

U.S. Taxes Overseas and Self-Employed Expats

Moving abroad as a business owner triggers an avalanche of tax considerations. In some cases, you can keep your U.S. entity, but in others, you cannot. For this reason, self-employed expats may need to continue paying U.S. Social Security and Medicare taxes (15.3% in 2026) on their earned income. However, if you are paying into the social security scheme of your country of residence, you may be exempt.

How to check whether you owe U.S. Social Security and Medicare taxes

You can double-check by confirming if a Social Security Totalization Agreement exists with the U.S. and your country of residence. Totalization agreements do not exist with every country, but where they do, they provide guidance around how to avoid double taxation on income with respect to social security taxes. You can find this information on the SSA.gov website.

Filing a Federal U.S. Expat Tax Return

As we mentioned, filing U.S. taxes from overseas still begins with a 1040.

In this section, we’ll review common forms, filing obligations, and additional thresholds to be aware of.

Common U.S. Expatriate Tax Forms

IRS Form 2555 - Foreign Earned Income Exclusion (FEIE)

The FEIE allows you to exclude up to $130,000 (for tax year 2025) of foreign-earned income from taxation by the IRS. For tax year 2026 (the taxes you’ll file in 2027), the threshold is $132,500.

This provision is typically best for U.S. expats who pay less foreign tax than they would have in the U.S. and only applies to earned income.

IRS Form 1116 - Foreign Tax Credit (FTC)

The FTC allows qualifying expats to take a dollar-for-dollar, non-refundable credit for each dollar paid in foreign taxes, often allowing expats to wipe out their U.S. tax liability.

This provision is typically best for U.S. expatriates who paid more in foreign tax than what they would have in the U.S. It can be used on both earned and unearned/passive income.

Foreign Bank Account Report (FBAR); FinCEN Form 114

U.S. taxpayers are required to file an FBAR if they hold an equivalent of $10,000 U.S.D in any one or more foreign bank accounts. The purpose of the form is purely administrative, providing information to the Financial Crimes Enforcement Network to help the bureau combat tax evasion. To correctly report the foreign currency into U.S. Dollars use the official Treasury Reporting Rates of Exchange rate. This is different from the IRS-provided annual average exchange rates.

Note that the $10,000 threshold refers to the sum total of all money held in foreign bank accounts. So, if you have $6000 and $4000 across two separate German bank accounts at any point in the year, FBAR filing is required.

Pro tip: When in doubt, include a foreign account. This filing is for administrative purposes only.

Foreign Account Tax and Compliance Act (FATCA); Form 8938

FATCA requires U.S. expatriates to report foreign financial accounts exceeding $200,000 (for single filers) or $400,000 (for joint filers) on Form 8938 with their tax return. This is separate from FBAR and ensures compliance with U.S. tax laws on global assets. Non-compliance can result in significant penalties.

IRS Form 8621: Passive Foreign Investment Company (PFIC)

PFIC filing is required for U.S. expatriates who own shares in a Passive Foreign Investment Company (PFIC), such as foreign mutual funds, ETFs, or certain offshore investments. The form reports income, gains, and distributions from PFICs to ensure proper U.S. tax compliance. Failure to file can lead to punitive tax treatment and interest charges on gains.

The catch here is that PFIC filing is often triggered by foreign investment or retirement accounts, many of which are standard practice in most foreign countries. Further complicating the issue is that many foreign employers and banks are unaware of the unique rules governing U.S. expatriates’ best interests, so it’s best to check with a cross-border tax or financial professional before opening any foreign account that is not a checking account.

Check If You Need to File a State Tax Return

Most states will require you to pay taxes if you retain what’s referred to as “significant ties.”

The definition of significant ties varies, but includes more or less than what’s listed below.

Having the following in the U.S. may trigger state tax filing, even if you reside in a foreign country:

Property
Investments
Voter registration
Dependents

If you are concerned about a potential state tax filing requirement, it’s best to speak with a cross-border tax expert knowledgeable about expatriate taxes.

Tricky (AKA “Sticky”) States

In many cases, Americans who pack up their lives, move abroad, and file U.S. taxes only have to contend with federal taxes.

However, a handful of states are referred to as “sticky” within the tax community because they are especially difficult to extricate from.

If your last state of residence prior to living abroad was any of the following, you will need to proceed carefully to mitigate your U.S. state tax liability:

New York
Virginia
California
New Mexico, or
South Carolina

Research Other Expat Tax Provisions

U.S. expatriate tax complexity only increases when you factor in big-picture strategic thinking, such as retirement or other international moves.

However, developing your understanding to include key expatriate tax vocabulary is an excellent way to take control of your expat financial management obligations.

Below, we’re rounding up a “quick hits” list of other important IRS tax provisions that remain available to expats too, as well as important bilateral agreements that may be helpful to you.

Child Tax Credit

Updated under the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, this credit now permits U.S. taxpayers to claim a partially refundable $2,200 tax credit per qualifying dependent child under age 17 (up from $2,000). The refundable portion (also called the Additional Child Tax Credit) is up to $1,700 per child for 2025, and both amounts are now permanently indexed for inflation.

The phase-out threshold remains at $200,000 for single filers and $400,000 for married filing jointly.

One important OBBBA change for expat families: beginning in 2025, at least one parent must have a valid, work-eligible Social Security Number (SSN) to claim the credit, ITINs no longer suffice for the parent. Each qualifying child must also have a valid SSN.

The Child Tax Credit is not available for expats who file using the Foreign Earned Income Exclusion (Form 2555), because the FEIE reduces U.S. taxable income (often to zero), which in turn eliminates the tax liability needed to claim the credit. If you have dependent children, it is especially worth comparing the FEIE and FTC approaches; in some cases, forgoing the FEIE and using the FTC instead can unlock $1,700 or more per child in refundable credits.

Save for later:How to Move Abroad with Family (Based on Personal Experience)

Student Loan Interest Deduction

This dedication permits U.S. taxpayers to deduct up to $2,500 in interest paid on qualified student loans.

Note: Married Filing Separately filing status is not eligible for this deduction.

No Tax on Tips and Overtime (2025–2028)

One of the most-discussed provisions of the OBBBA is the introduction of new deductions for tip income and overtime pay. These are above-the-line deductions, meaning they are available whether you itemize or not. Here's what the law says, and the important limitations that apply to most Americans living abroad.

Qualified tips deduction

Workers in occupations that customarily receive tips may deduct up to $25,000 of tip income per year. Tips must be reported on a Form W-2, Form 1099, or Form 4137.

Qualified overtime deduction

Employees may deduct the "premium" portion of overtime pay, generally the extra half-pay above their regular rate required under the Fair Labor Standards Act (FLSA), up to $12,500 per year ($25,000 for joint filers).

Both deductions phase out for taxpayers with modified adjusted gross income above $150,000 ($300,000 for joint filers), and both expire after 2028 unless extended by Congress.

For most expats working in Europe, these deductions are not accessible.

The overtime deduction is explicitly tied to the Fair Labor Standards Act, a U.S. domestic employment law. If you work for a European employer governed by local labor law, as the majority of U.S. expats do, your overtime pay simply does not qualify.
Both deductions require income to be reported on a U.S. Form W-2 or 1099. European employers issue local payroll documents, not U.S. tax forms.
If you use the FEIE to exclude your foreign wages, you cannot also apply the tips or overtime deduction to the same income. The IRS does not permit double-dipping.

There is a narrow exception: Americans employed abroad by a U.S. company that maintains U.S. payroll reporting and operates under FLSA standards may potentially qualify. If this describes your situation, it's worth discussing with your advisor.

The bottom line: the FEIE and the Foreign Tax Credit remain the most effective planning tools for U.S. expats in Europe. The new tips and overtime provisions were designed for the U.S. domestic workforce and provide little practical benefit to most Americans abroad.

Foreign Housing Exclusion

Like the FEIE, this exclusion is filed with IRS Form 2555. With this exclusion, Americans deduct certain foreign housing expenses from their taxable income.

Most expats who qualify for the FEIE are also eligible for the Foreign Housing Exclusion.

Housing expenses go beyond rent to include utilities, property insurance, furniture rental, and parking, so be sure to add all the expenses to your total to maximize your deduction!

IRA Deduction

U.S. taxpayers can make deductible or non-deductible IRA contributions based on their income and access to a qualified retirement account.

While most taxpayers must meet income thresholds to deduct their contributions, U.S. expats who do not have access to an employer-sponsored U.S. retirement plan are not subject to these income limits. This means they can make traditional IRA contributions regardless of their earnings and may deduct them, providing valuable tax-deferred growth opportunities for retirement.

Additionally, Roth IRA contributions may still be made based on Modified Adjusted Gross Income (MAGI) limits. Work with your tax and financial planning team to ensure you optimize your retirement savings as an expat.

Important Terminology

Below is a roundup of common terminology that's important to familiarize yourself with as a current or prospective U.S. expat.

Double Taxation Treaty

A tax treaty is a bilateral (two-party) agreement made by two countries to resolve issues involving double taxation of passive and active income of each of their respective citizens. These differ from Totalization Agreements in that tax treaties explain who gets taxing rights to different types of income, whereas Totalization Agreements explain to which country you owe Social Security and self-employment tax, as applicable.

The details of these will vary from country to country and often have significant implications when making cross-border financial planning decisions.

Savings Clause

Most U.S. tax treaties contain a savings clause that allows the U.S. to tax its citizens and residents as if the treaty had not come into effect. This clause ensures that U.S. citizens and residents cannot use the treaty to avoid U.S. taxation on their worldwide income.

As an example, see the wording of the savings clause from Article 1, Paragraph 2 of the U.S.-Switzerland Tax Treaty:

"Notwithstanding any provision of this Convention except paragraph 3 of this Article, the United States may tax a person who is treated as a resident under its taxation laws (except where such person is determined to be a resident of Switzerland under the provisions of paragraphs 3 or 4 of Article 4 (Resident)) and its citizens (including its former citizens) as if this Convention had not come into effect."

This clause prevents tax avoidance by ensuring U.S. citizens and residents remain subject to U.S. tax rules regardless of foreign tax treaty provisions.

Totalization Agreement

Totalization Agreements “...eliminate dual Social Security taxation, the situation that occurs when a worker from one country works in another country and is required to pay Social Security taxes to both countries on the same earnings…the agreements help fill gaps in benefit protection for workers who have divided their careers between the United States and another country.”

Note: Questions concerning Totalization Agreements and retirement benefits should be directed to the SSA, not the IRS. There was an extremely positive development in the way the U.S. handles retirement distributions in 2025, learn more about the Windfall Elimination Provision repeal.

Select Cross-Border Expatriate Tax and Finance Pros

As you can tell, filing U.S. expat taxes is a complex and deeply personal endeavor.

Doing so correctly often requires expert analytical and research capacities, which is where certified professionals with cross-border expertise come into play. Expat tax professionals are an important part of this picture, however, in complex cases, a cross-border financial planner is essential for setting the CPA up for success. Always confirm that your team has the expertise in your resident country as rules and planning opportunities vary country to country.

If you have plans to move to Europe or already live in Europe, you may be an excellent candidate for personalized cross-border financial planning.

U.S. Expat Taxation – FAQ

How do I file U.S. taxes from abroad?

You begin with IRS Form 1040 like usual, and then research with respect to the expatriate tax provisions that apply best in your situation to minimize your U.S. tax liability. In many cases, you may want to connect with a vetted expat tax advisor who specializes in working with people in your situation.

What happens if you don’t file taxes while living abroad?

Neglecting to file U.S. tax returns as an expatriate risks financial and criminal penalties by the IRS. Consequences vary, but in general, the higher your net worth, the steeper the penalties. If you have only recently realized you have outstanding U.S. tax filing obligations, the IRS offers programs to come into compliance. We recommend working with an international tax specialist to support you.

How is retirement income taxed if you live abroad?

The taxation of distributions from U.S. retirement accounts by foreign countries depends on many factors, including but not limited to which foreign country you’re moving to (e.g., Switzerland), whether you’re moving on a special immigration scheme, or will benefit from a local tax regime. Planning ahead is imperative for U.S. retirees seeking to enjoy their retirement abroad.

References

Meet the Author

Arielle Tucker is a Certified Financial Planner™ and IRS Enrolled Agent with Connected Financial Planning. She's spent over a decade working with U.S. expats on U.S. tax and financial planning issues. She is passionate about working with U.S. expats and their families to help secure a financial future that is reflective of their core values. Arielle grew up in New York and has lived throughout the U.S., Germany, and Switzerland. Connected Financial Planning offers a complimentary introduction call for individuals and families seeking ongoing, comprehensive planning. You can schedule a call here.

This article is intended for general educational purposes only and does not constitute tax or legal advice. Tax rules can change and individual circumstances vary significantly. Please consult a qualified cross-border tax professional before making decisions based on this content.