Living abroad, whether for work, retirement, or maintaining ties to multiple countries, doesn’t free U.S. citizens and resident aliens from their tax obligations, and these responsibilities can quickly become complex. According to the Wall Street Journal, at least 180,000 Americans relocated overseas in 2025. The number of U.S. citizens living outside of the U.S. now likely exceeds well over 5.5 million. While most countries tax based on residence, the U.S., requires its citizens and resident aliens to report and pay taxes on worldwide income, regardless of where they live. This system of citizenship-based taxation means that Americans abroad likely most often face the same income, estate, and gift tax obligations as those living domestically. Many are unaware of these requirements or of the complex reporting rules for foreign accounts and assets, which can lead to significant penalties. Understanding these obligations as well as the avenues for compliance, relief, or correction is essential for any U.S. citizen navigating life overseas.
Tax obligations of U.S. citizens and resident aliens residing overseas
Even while living abroad, U.S. citizens and resident aliens remain fully accountable for their income, estate, and gift tax obligations, just as if they were residing in the U.S. All income earned worldwide must be reported, and taxes must be paid in accordance with the Internal Revenue Code. Those with foreign financial accounts including bank, brokerage, or mutual fund accounts, also face strict reporting requirements under the Bank Secrecy Act. Each year, these accounts must be disclosed to the U.S. Treasury by filing a Report of Foreign Bank and Financial Accounts (FBAR) on FinCEN Form 114, even if the accounts generate no taxable income, if the aggregate value of all accounts exceeded $10,000 at any time during the year, unless all your foreign accounts fall under certain exceptions, such as accounts maintained at a U.S. military banking facility, accounts owned by a governmental entity, or certain jointly held accounts properly reported by your spouse.
Green card and substantial presence rules
If you are not a U.S. citizen, you may still be considered a resident alien for tax purposes if you meet either the Green Card Test or the Substantial Presence Test.
What is the Green Card Test?
You meet this test if you are a lawful permanent resident of the U.S., at any point during the year, usually proven by a Form I-551, Permanent Resident Card. Your resident status continues unless it is officially revoked or administratively determined to have been abandoned.
What is the Substantial Presence Test?
You generally meet this test if you spend:
- 31 days in the U.S. during the current year, and
- 183 days over a three-year period, counting:
- All days in the current year,
- One-third of the days in the first preceding year, and
- One-sixth of the days in the second preceding year.
Certain days do not count toward the Substantial Presence Test, such as brief transits through the U.S., days spent in the country under qualifying diplomatic, student, or trainee visas, days when departure was prevented by medical reasons, and days spent as an exempt professional athlete in a charitable event, among others.
Tax relief options for U.S. citizens and green card holders abroad
U.S. citizens and green card holders are generally required to report and pay tax on their worldwide income, even while living abroad. However, there are several legal ways to reduce U.S. tax liability, including the Foreign Earned Income Exclusion (FEIE), the Foreign Tax Credit, and benefits available under U.S. tax treaties.
i. Foreign Earned Income Exclusion (FEIE)
If you are a U.S. citizen or resident alien working abroad, your worldwide income is generally subject to U.S. tax. However, you may be able to exclude a portion of your foreign earnings, deduct certain foreign housing costs, or exclude the value of employer-provided meals and lodging. To claim these benefits, you generally must meet five key requirements:
- Tax Home – Your principal place of business, employment, or post of duty must be in a foreign country (or countries), regardless of where your family home is.
- Foreign Country – You must live or work in a foreign country(or countries).
- Foreign Earned Income – You must earn wages, salaries, or self-employment income for services performed in a foreign country (or countries).
- Bona Fide Residence or Physical Presence – You must meet one of these tests:
- Bona Fide Residence Test: Be a bona fide resident of a foreign country for an uninterrupted period that includes a full tax year. Simply living abroad for a year does not automatically qualify.
- Physical Presence Test: Be physically present in a foreign country (or countries) for 330 full days during any 12-month period. Days do not have to be consecutive.
Exceptions: Time requirements may be waived if you leave a foreign country due to war, civil unrest, or other adverse conditions.
- Valid Election – You must file Form 2555 with your income tax return to make a valid election for the exclusion.
These exclusions can significantly reduce your taxable income, but you must file Form 2555 with your tax return to claim them.
ii. Tax Treaty Benefits
The U.S. has bilateral tax treaties with many countries designed to prevent double taxation and provide special tax benefits for U.S. citizens and residents. Eligible individuals may claim certain credits, deductions, exemptions, or reduced tax rates under these treaties. It’s important to note that treaty benefits are generally available to U.S. residents. U.S. citizens who do not reside in the U.S., usually cannot claim them, though certain provisions, such as non-discrimination rules, may still apply. Additionally, U.S. citizens living abroad might be eligible for benefits under that foreign country’s treaties with third countries.
iii. Maximizing Tax Benefits Through Filing Status (Foreign Spouses)
When you’re a U.S. citizen married to a nonresident spouse, your choice of filing status can make a real difference in your tax liability. You essentially have three options: (1) Married Filing Jointly (MFJ), (2) Married Filing Separately (MFS), or, in certain cases, (3) Head of Household (HOH).
Filing jointly lets you treat your spouse as a U.S. resident, giving you access to the wider tax brackets and higher standard deduction, but it also means your spouse’s worldwide income becomes reportable, and additional reporting like FBAR or Form 8938 may apply.
Filing separately keeps your spouse’s foreign income off your return, though it can limit credits and deductions. HOH may be an option if you have a qualifying child or dependent and do not elect MFJ, effectively treating yourself as unmarried for tax purposes.
Example:
Anna, a U.S. citizen living and working in Poland, earns $105,000 from her tech consulting business. Her husband, Jakub, is a Polish citizen with minimal income of less than $6,000 from a small freelance project. By electing Married Filing Jointly (MFJ), Anna gains access to wider U.S. tax brackets and the higher standard deduction, even though Jakub’s income is now included in the U.S. return. After combining their incomes, Anna carefully evaluates whether claiming the Foreign Earned Income Exclusion or applying the Foreign Tax Credit will more effectively reduce her U.S. tax liability. This approach allows her to minimize U.S. taxes legally while remaining fully compliant with reporting obligations.
Deciding which filing status is right for you depends on your spouse’s income, your household circumstances, and your long-term plans.
Fixing past filing issues and avoiding penalties
If you’re a U.S. citizen or U.S. resident living overseas, finding out you have U.S. tax obligations can be stressful. The good news is there are ways to catch up while minimizing penalties.
Streamlined Procedure
The Streamlined Foreign Offshore Procedures allow eligible expats who were unaware of their filing obligations to catch up on their U.S. taxes by filing the last three years of tax returns and six years of FBARs. If the failure to file was non-willful, the IRS may waive penalties.
Voluntary Disclosure
For situations involving potential willful noncompliance, the IRS Voluntary Disclosure Practice allows taxpayers to come forward, file corrected returns, and resolve outstanding liabilities while potentially reducing the risk of criminal prosecution.
Foreign Account Reporting (FBAR and Form 8938)
Many expats must report foreign financial accounts and assets even if no tax is owed. The FBAR (FinCEN Form 114) is required if the total value of foreign accounts exceeds $10,000 at any point during the year and must be filed separately with FinCEN. Form 8938 may also be required with your tax return if foreign financial assets exceed certain thresholds. Failure to file these reports can trigger significant penalties, even if no tax is owed, but they can often be corrected through IRS compliance procedures.
Former-Citizen Relief
If you renounced U.S. citizenship but did not file all required returns, relief may be available if your net worth is two million dollars or less and your total U.S. tax over the expatriation year and prior five years does not exceed twenty-five thousand dollars. You must submit Form 8854 to certify compliance and avoid being treated as a “covered expatriate,” which could trigger substantial additional taxes.
Renouncing Citizenship
For some long-term expats with another nationality, giving up U.S. citizenship may make sense financially, but it carries costs and long-term consequences. While this can stop future U.S. filings, it does not erase past obligations. Final-year returns, Form 8854, and possible exit tax may still apply.
How KBiW Kurpiejewski & Associates, PLLC can help
U.S. citizens and green card holders living abroad remain subject to U.S. taxation on their worldwide income, but provisions such as the Foreign Earned Income Exclusion, Foreign Tax Credits, and applicable treaty benefits can substantially reduce or even eliminate double taxation when applied correctly. At the same time, failing to file required returns or foreign account reports can result in penalties, lost tax benefits, and serious consequences, such as possible revocation of your U.S. passport by the State Department. Given the complexity and fact-specific nature of international tax rules, addressing obligations promptly and structuring filings strategically is essential. To schedule a consultation and learn how we can help you, please call us at (212) 220-3956 or email office@kbiw.com.
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