I fought hard to become an American citizen. Born in India, I moved here in 2008 and became a citizen over a decade later. America has been incredibly good to me and I would never even consider giving up my passport. But it comes with responsibilities: America has one of the stickiest tax regimes for people who live abroad. The United States is one of only two countries in the entire world (the other is Eritrea, if you’re curious) that taxes its citizens on their worldwide income, regardless of where they live. That means if you’re a US citizen working remotely from Lisbon or on a two-year assignment in Singapore, the IRS still expects to hear from you every single year. And it’s not just filing, you could owe them money too. Luckily there are some incredibly powerful strategies you can use to offset hundreds of thousands in taxes. I get a ton of DMs about this topic from readers, so I put together my strategies for taxes for Americans living abroad. Let’s get into it.

The Bad News First

Here’s what catches most people off guard. Even if you’ve been living in Barcelona for five years and haven’t set foot in America, you are still required to file a US federal tax return if you have income above the standard filing threshold. If you’re under the age of 65 in 2025, that’s $15,750 if you’re single or $31,500 if you’re married filing jointly. And it’s not just income taxes. If you have more than $10,000 in foreign bank accounts at any point during the year, you need to file an FBAR (Foreign Bank Account Report). Miss your FBAR filing and the penalties can be expensive. The filing deadline for expats is automatically extended to June 15, but any taxes owed are still due by April 15. You can extend further to October 15 with Form 4868. Now for the good news: there are several powerful strategies that can dramatically reduce (or even eliminate) your US tax bill.

Foreign Earned Income Exclusion (FEIE)

This is the big one that most expats rely on. The Foreign Earned Income Exclusion allowed you to exclude up to $130,000 of your foriegn earned income in 2025, increased to $132,900 in 2026. For married couples where both spouses work abroad and qualify, that’s $265,800 combined in 2026 (or $260,000 in 2025) that you can potentially exclude from federal taxation. Let me break down exactly how this works. What qualifies as foreign earned income? This includes wages, salaries, bonuses, self-employment income, and professional fees earned while you’re working in a foreign country. What it does NOT include: investment income, dividends, interest, rental income, pensions, or capital gains. More on that later. How do you qualify? You need to pass one of two tests: The Physical Presence Test is the most straightforward. You must be physically outside the US for at least 330 full days during any 12-month period. This is the safer test because it’s objective and easy to measure. I generally recommend this approach for digital nomads who are moving around frequently. You can also choose the most favorable 12-month window, this especially helps if you’re moving back and want to select a generous return date. A few important nuances:

  • The 12-month period doesn’t have to match the calendar year.
  • It can be any consecutive 12-month period that starts or ends in the tax year you’re filing for.
  • Days spent traveling over international waters don’t count.
  • The 330 days don’t need to be consecutive.

The Bona Fide Residence Test requires you to be a resident of a foreign country for an uninterrupted period that includes an entire calendar year (January 1 through December 31). This test is more subjective. The IRS looks at factors like your personal (ex: family and work) and financial (ex: assets and income) ties to the country. For example, you have a French partner, kids enrolled in a local French school, working a job in France, owning your home in France. If you’re on a multi-year assignment abroad, this test can be easier because you don’t have to count days. But for digital nomads hopping between countries, stick with the Physical Presence Test. The FEIE is an exclusion, not a deduction. This distinction matters for tax bracket purposes. The IRS calculates your tax rate based on your total income before applying the exclusion, then removes the excluded amount. This means if you earn $150,000 and exclude $132,900, you pay taxes on the remaining $17,100 at the rates that would apply to someone earning $150,000. Not at the bottom of the bracket. For many expats though, the FEIE alone is enough to wipe out their federal income tax liability entirely.

Foreign Housing Exclusion

On top of the FEIE, you may be able to exclude additional income to cover your housing costs abroad. The Foreign Housing Exclusion lets you deduct qualifying housing expenses above a base amount (currently 16% of the FEIE limit, or $21,264 for 2026). For most locations, the maximum you can exclude is around $39,870 (30% of the FEIE). But this is where it gets good: if you live in a designated high-cost city, the limits are significantly higher. Some of these are incredibly generous, for 2025 examples include:

City Maximum Housing Exclusion
Hong Kong $114,300
Geneva $102,600
Singapore $82,900
Tokyo $67,700
London $67,000
Mexico City $47,900

The IRS publishes a full list of high-cost localities each year in Notice 2025-16 (or the equivalent for the current year). Qualifying expenses include:

  • rent
  • utilities (except phone)
  • property insurance
  • furniture rental
  • some repairs

Mortgage principal, home purchases, and household staff (like a housekeeper or cook) don’t count. If you’re self-employed, you claim the Foreign Housing Deduction instead of the exclusion. Same concept, slightly different mechanics. Add up your qualifying housing expenses, subtract the base amount, and you can exclude the difference (up to your location’s limit).

Foreign Tax Credit (FTC)

The Foreign Tax Credit is an entirely different approach from the FEIE. Instead of excluding income, the FTC gives you a dollar-for-dollar credit for income taxes you’ve already paid to foreign governments. So if you live in the UK and pay 40% to UK tax collector (HMRC), you can use that to offset what you’d otherwise owe to the IRS. The FTC can be carried back one year or carried forward up to ten years if you can’t use it all in the current year. Here’s the critical rule: You cannot claim both the FEIE and the FTC on the same income. But you CAN use them together on different types of income. For example, you might use the FEIE on your salary and the FTC on investment income that doesn’t qualify for the exclusion.

FEIE vs FTC: Which Should You Use?

This is genuinely one of the most important decisions expats have to make. Use the FEIE when:

  • You live in a low-tax or no-tax country (UAE, Singapore, etc.)
  • Your income is below the FEIE limit
  • You want simplicity and certainty

Use the FTC when:

  • You live in a high-tax country (UK, Germany, France, Scandinavia)
  • Your foreign tax rate exceeds your US rate
  • You have significant investment income

This part is important: if you elect to use the FEIE and later revoke it, you cannot use the FEIE again for 5 years without IRS approval. This is called the “revocation trap” and it catches a lot of people who switch between low-tax and high-tax countries. Think carefully before making this election. It’s worth running the numbers both ways, ideally with a tax professional who specializes in expat returns.

The Self-Employment Tax Problem

The Foreign Earned Income Exclusion does NOT exempt you from self-employment taxes. I’ll say that again because it’s so important: even if you exclude all your income from federal income tax, you still owe 15.3% in self-employment taxes (12.4% Social Security + 2.9% Medicare) on your net earnings. On $130,000 of self-employment income, that’s almost $20,000 in taxes you still owe, even if your income tax liability is zero. There are a few ways to mitigate this: Totalization Agreements The US has totalization agreements with 30 countries that prevent double taxation of Social Security. If you’re paying into the social security system of an agreement country, you may be able to offset the US self-employment tax with what you pay there. Countries with agreements generally have higher social security taxes than the US, they include the UK, Canada, Germany, France, Australia, Japan, and most of Western Europe. Notable countries WITHOUT agreements include Singapore, Hong Kong, Thailand, UAE, and New Zealand. If you live in a country with an agreement and pay into their system, get a Certificate of Coverage from that country’s social security agency. This proves you’re exempt from US self-employment taxes. The S-Corp Strategy If you’re self-employed, an S-Corp election can help reduce your self-employment tax burden. Its proportional impact scales significantly with income. I’ve written about this extensively in my Self-Employed Tax Saving Handbook, but the short version is: an S-Corp lets you split your income between “reasonable salary” (subject to employment taxes) and “distributions” (not subject to employment taxes). The catch for expats is you need to pay yourself a reasonable salary via W-2 payroll, which adds complexity when you’re abroad. Solo 401k If you have self-employment income that’s above the FEIE threshold, you can still contribute to a Solo 401k to reduce your taxable income. For 2026, you can contribute up to $24,500 as an employee deferral, plus up to 25% of your compensation as an employer contribution, for a total of up to $72,000. Your Solo 401k contribution comes from your US taxable income. If you earn $200,000, exclude $132,900 under the FEIE, you have $67,100 of taxable income. You could potentially shelter most of that in your Solo 401k. This works especially well if you’re an S-Corp paying yourself a salary above the FEIE limit.

Sticky State Taxes

This is where people can get unexpected tax bills. Many expats assume that leaving the country means they’re done with state taxes too. That’s not the case. Severing ties with states can save you thousands. Five states are particularly zealous in taxing former residents:

  1. California – The stickiest of them all. California will assume you’re still a resident unless you can prove otherwise. They look at everything: driver’s license, voter registration, property ownership, bank accounts, professional licenses, and family ties.
  2. New York – Similar to California. They’ll examine your “domicile” (where you intend to return) separately from your residency (where you physically live).
  3. New Jersey – Requires you to prove you’ve established domicile elsewhere.
  4. Virginia – Has aggressive audit programs for people who claim to have left.
  5. South Carolina – Also known for pursuing former residents.

If you’re leaving from a sticky state, consider establishing residency in a no-income-tax state (Florida, Texas, Nevada, Wyoming, etc.) BEFORE you move abroad. This creates a clean paper trail. For example, let’s say you lived in California, moved to Florida (got a Florida driver’s license, registered to vote in Florida, etc.), and then you left for abroad from a state with no income tax. You would likely qualify for Florida state tax treatment. If you’re already abroad and still technically a resident of a sticky state, you may want to sever ties with the state in question: sell or rent out your property, close local bank accounts, surrender your driver’s license, and remove yourself from voter rolls. The Nine Tax-Free States If your last US residence was in one of these states, you’re in luck: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming. For most purposes, these states won’t chase you for income taxes and are the best to choose as an intermediary residence before moving abroad.

Investment Income and Capital Gains

Here’s where things get tricky for high earners. The FEIE only covers earned income. Investment income, including interest, dividends, capital gains, and rental income, is NOT eligible for exclusion. You have two main options:

  1. The Foreign Tax Credit – If you’re paying taxes on investment income in your country of residence, you can credit those against your US liability.
  2. Tax-Advantaged Accounts – Income earned inside tax-advantaged accounts like IRAs, 401ks, and HSAs remains sheltered regardless of where you live.

If you have significant investment income, this is another strong argument for using the FTC instead of (or in addition to) the FEIE. I’ve written extensively about strategies like direct indexing and tax-loss harvesting that can help manage your investment tax liability regardless of where you live.

Don’t Forget These Reporting Requirements

Beyond income taxes, expats have additional reporting requirements that can have severe penalties for non-compliance. FBAR (FinCEN Form 114) Excuse my French, but the IRS really doesn’t fuck around with FBARs. These exist to monitor offshore chicanery, like tax evasion or money laundering. If you have foreign financial accounts with an aggregate value exceeding $10,000 at any point during the year, you must file an FBAR by April 15 (with automatic extension to October 15). Willful failure to file can result in penalties up to $100,000 or 50% of the account balance, and prison time. Non-willful failures can still be $10,000+ per violation. FATCA (Form 8938) If your foreign financial assets exceed certain thresholds ($200,000 on the last day of the year or $300,000 at any point for single filers living abroad), you must report them on Form 8938. These requirements are separate from the FBAR, so you may need to file both.

The Nuclear Option

Some people have had enough of US taxes, so much so that they give up their US citizenship entirely. I would never do this. I fought too hard to become American, and the benefits of citizenship extend far beyond taxes. But people ask about it constantly, so here’s what you need to know. The Exit Tax If your net worth exceeds $2 million or your average annual net income tax liability for the five years ending before expatriation exceeds a certain threshold (around $190,000 in 2025), you’re a “covered expatriate” and subject to the exit tax. The exit tax treats all your assets as if they were sold on the day before expatriation. You pay capital gains on all unrealized appreciation. This can be an eye-watering bill. It could mean paying capital gains on decades of appreciation in your investment portfolio, your home, your business, everything, all at once. The Process Renouncing citizenship requires appearing in person at a US embassy or consulate abroad, paying a $2,350 fee, and filing a final tax return (Form 8854). It’s not a casual decision, and it’s not reversible. For 99.9% of people, the tax strategies I’ve outlined above are more than sufficient to manage your US tax burden as an expat. Renouncing should be an absolute last resort, not a tax planning strategy.

Need Help? Get Connected With an Expat Tax Specialist

I’ve given you a lot of information in this post. But expat taxes are genuinely complicated and the stakes are high. A good expat tax professional will more than pay for themselves through proper structuring, especially by saving you from costly mistakes. The truth is that international tax law is so complicated, I can never cover all the potential cases in a single post. I’ve partnered with a tax firm that specializes specifically in US expats and digital nomads. They understand the nuances of international taxation: FEIE vs FTC decisions, totalization agreements, state tax severance, FBAR compliance, and everything else I’ve covered here. If you want to be connected with them, just fill out this brief form asking for an intro and my team will put you in touch. We personally vetted this firm before agreeing to partner with them. They’re well-versed in all these strategies, and they can handle complex situations like multi-country income, self-employment abroad, and investment income optimization. Request your expat tax specialist introduction in <1min →

Final Thoughts

Moving abroad is exciting. The tax stuff is often less so, but getting it right is key to having a pleasant life abroad. Before you go, remember these 5 key points:

  1. You still have to file. American citizenship comes with tax obligations, no matter where you live.
  2. The FEIE is powerful. Excluding $132,900+ of earned income can eliminate most or all of your federal tax liability.
  3. Self-employment taxes hurt. Plan for them, whether through totalization agreements, S-Corp elections, or Solo 401k contributions.
  4. State taxes matter. Sever ties properly, especially from sticky states like California and New York.
  5. Don’t DIY this if you make serious money. A qualified expat tax professional is worth every penny.

Reply and let me know: Are you living abroad or thinking about it? What tax questions do you have that I didn’t cover? See you next week, — Ankur

Author Disclosure: I’m writing this as myself, not as some investment adviser or broker-dealer. I’m not a tax professional, this is all purely educational or my personal thoughts – not investment, legal, tax, or professional advice. Financial decisions involve risk, including losing money. Taxes are complex. Please do your own research or talk to a licensed pro before acting on anything you read here.