US Taxes When You Live Abroad: The 3 Things Every American Must Understand

Here is the piece of information that stops more Americans from exploring a move abroad than any practical obstacle: the belief that living abroad means escaping US taxes. Or the opposite: the belief that living abroad means paying double taxes.

Neither is right. The truth is more specific and more navigable than either misconception — but it requires understanding three things that no one explains plainly enough.

Thing 1: Americans Are Taxed on Worldwide Income — But the FEIE Changes the Math

US citizens owe federal income tax on worldwide income, regardless of where they live. If you earn $80,000 remotely while living in Dakar, you owe US taxes on that $80,000. There is no avoiding this — it is a feature of the US tax system that applies to every American abroad.

However: the Foreign Earned Income Exclusion (FEIE) can legally eliminate most or all of that liability for Americans who qualify. The FEIE (claimed on IRS Form 2555) allows you to exclude earned income from US federal income taxes up to a threshold of $126,500 in 2025 (adjusted annually for inflation).

To qualify for the FEIE, you must meet one of two tests: the Physical Presence Test (you were outside the US for at least 330 days in any 12-month period beginning or ending in the tax year) or the Bona Fide Residence Test (you are a bona fide resident of a foreign country for an entire calendar year).

For most Americans working remotely abroad, the Physical Presence Test is the most straightforward path: spend 330+ days outside the US in a given 12-month period, and you qualify to exclude up to $126,500 in earned income from federal tax.

Important: the FEIE does not eliminate self-employment tax (the 15.3% tax on self-employment income). It does not cover investment income, rental income, or other passive income. And it requires you to still file a US tax return — the exclusion is claimed by filing, not by not filing.

Thing 2: FBAR — The Foreign Account Report You Must File

If you have one or more foreign bank accounts with combined balances exceeding $10,000 at any point during the calendar year, you are required to file a FinCEN Form 114 — commonly known as the FBAR (Foreign Bank Account Report).

The FBAR is filed separately from your tax return, through the FinCEN BSA E-Filing system, and is due on April 15 (with an automatic extension to October 15 if missed).

The penalties for failure to file are severe: up to $10,000 per violation for non-willful failures, and significantly higher penalties (or criminal prosecution) for willful failures. The IRS has been actively enforcing FBAR compliance for over a decade.

Practically: if you open a local bank account abroad for daily expenses — which most expats do — you need to track the balance. If it ever exceeds $10,000 (combined with any other foreign accounts), you file the FBAR. This is not difficult; it is simply required.

Thing 3: FATCA — The Foreign Asset Report at Higher Thresholds

FATCA (Foreign Account Tax Compliance Act) requires US citizens abroad to report foreign financial assets exceeding certain thresholds on Form 8938, filed with your regular tax return.

The thresholds for single filers living abroad: $200,000 on the last day of the tax year, OR $300,000 at any point during the year. (Lower thresholds apply if you live in the US.) Foreign financial assets include foreign bank accounts, brokerage accounts, foreign pension plans, and interests in foreign entities.

FATCA is broader than FBAR: while FBAR covers foreign bank accounts, FATCA covers a wider range of foreign financial interests. Most expats who only have a local checking account for daily expenses and maintain their primary accounts in the US will not hit FATCA thresholds. Those with significant foreign investments or assets need to be aware of this requirement.

The State Tax Question

Federal taxes are the well-documented part. State taxes are the variable that catches some expats off guard.

Several states — California, Maryland, Virginia, South Carolina, and a few others — have aggressive policies for maintaining tax residency for former residents who have not taken clear steps to establish domicile elsewhere. If you move abroad while maintaining a California address, a California driver's license, and California voter registration, California may continue to treat you as a California resident for tax purposes.

The solution: before moving abroad, establish clear domicile in a no-income-tax state or take definitive steps to terminate California (or other high-tax state) residency. This is one of the most overlooked pre-move financial preparations.

The Bottom Line on Expat Taxes

US taxes as an expat are not the nightmare people fear — but they do require intentional management. The FEIE is a legitimate, well-established tool that eliminates most federal tax liability for qualifying expats. FBAR and FATCA are compliance requirements that are navigable with the right filing system. State taxes require pre-departure planning.

None of this is DIY territory for most people. An expat CPA (Greenback Tax Services, Taxes for Expats, MyExpatTaxes) who handles this routinely is worth every dollar — the FEIE savings typically far exceed the preparation fee.

If you want to understand the tax picture for your specific income, your specific destination, and your specific situation before you move, this is one of the topics a Spark Session covers. Book a Spark Session Today!