Tax information for foreign residents: Essential insights on U.S. taxes for individuals residing abroad in the year 2025
Living and working abroad as a U.S. citizen or resident alien comes with unique tax implications. Two key provisions aim to reduce U.S. tax liability for Americans living abroad: the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC).
Foreign Earned Income Exclusion (FEIE)
To qualify for the FEIE, you must have foreign earned income and meet one of two tests: the Physical Presence Test or the Bona Fide Residence Test. The Physical Presence Test requires being physically present in a foreign country or countries for at least 330 full days during a 12-month period. The Bona Fide Residence Test requires establishing residence in a foreign country for an uninterrupted period that includes an entire tax year.
If you meet these criteria, you can exclude up to $130,000 of foreign earned income per individual (up to $260,000 for married couples where both qualify) from U.S. taxes in 2025. To claim the exclusion, you must file IRS Form 2555 with your U.S. tax return.
It's important to note that the FEIE only applies to earned income (e.g., wages, salaries, self-employment income earned abroad), not unearned income like rental income, dividends, or pensions.
Foreign Tax Credit (FTC)
To qualify for the FTC, you must have paid or accrued foreign income taxes to a foreign country or U.S. possession. The FTC allows for a dollar-for-dollar credit towards any U.S. taxes owed from foreign income taxes paid. To claim the credit, you must file IRS Form 1116.
The FTC applies regardless of meeting the FEIE requirements but is commonly used in conjunction to maximise tax savings. U.S. resident aliens include green card holders and those meeting the substantial presence test.
Key Points to Remember
- To qualify for the FEIE, you must have foreign earned income and meet either the bona fide residence test or the physical presence test.
- If your income exceeds the standard filing threshold, a Form 1040 must be filed.
- If you don't technically qualify for the physical presence test at the time of filing, you may still be able to claim the deduction by filing for an extension.
- For 2025, the base amount for foreign housing costs is $20,800, and the maximum expense is $39,000.
- Expats with foreign financial accounts worth over $10,000 at any point during the year must file a foreign bank account report (FBAR) separately from their tax return.
- Self-employed individuals earning $400 or more are required to file a tax return, regardless of total income.
- U.S. citizens and resident aliens must report their global income to the IRS, regardless of where it's earned.
- If you own specified foreign financial assets with values above set thresholds, you may need to file Form 8938 under the Foreign Account Tax Compliance Act (FATCA).
- If you opt not to claim the FEIE, you may be prevented from claiming it for the next 5 years.
- As a U.S. citizen living abroad, you're still entitled to the standard deduction, child tax credit, and can contribute to an IRA.
- To qualify for the foreign housing tax break, your tax home must be abroad, and you must meet either the bona fide residence test or the physical presence test.
- Filing a tax extension to October 15 is possible, but it needs to be requested.
- The foreign housing tax break allows for the exclusion or deduction of certain foreign housing costs above a base amount.
- The foreign housing exclusion is for employed individuals, while the foreign housing deduction is for self-employed individuals.
- The interaction between the FEIE, FTC, and foreign taxes paid can get complex for high-income earners in high-tax countries.
In the context of personal-finance management, understanding the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC) can significantly reduce U.S. tax liability for Americans living abroad. To use the FEIE, you must have foreign earned income, meet either the Bona Fide Residence Test or the Physical Presence Test, and file IRS Form 2555, while the FTC allows for a dollar-for-dollar credit towards U.S. taxes owed from foreign income taxes paid, requiring you to file IRS Form 1116.
