Hey guys, it's tax season! Time to run in fear.
Most countries have a fairly simple taxation rule when it comes to filing taxes: Pay taxes in the country that you live and work in. Don't worry about the taxes at home. But if you're American, hell hath no fury like Uncle Sam.
Besides the fact W-9s and 1040s don't get issued in the People's Republic of China,1 Americans also get shafted in terms of taxes they are required to pay. Depending on the exact circumstances, Americans are not only liable for paying foreign income taxes in the country they work in, but to the U.S., a unique situation in which they only share with the country of Eritrea.
(Double taxation ftw! The other solution is to throw an accountant at the problem... if you can find one who knows how to deal with it.)
No need to worry about April 15 (June 16 for 2025).
The first thing to know is that American nationals that live abroad get an automatic 2-month extension to file a federal tax return. There's nothing to do in order to be granted this extension.
Meaning, the 2025 deadline will be June 16, 2025. In other years, it would be June 15 for the tax filing deadline (tax filing deadlines take into account business days).
Consider it a bonus perk for having to deal with the additional complexity.
American expats get more screwed over by taxes compared to others.
The United States has a unique taxation law from most other countries in the world. So, in this case, your British, French and Italian friends working in Singapore can't help or give advice.
Talk about getting taxed on your worldwide income. Your foreign taxes are included.
How the foreign earned income exclusion (FEIE) works
The foreign earned income exclusion is essentially a "discount" on the taxable income paid to the United States, to account for the fact most American workers are already paying taxes in another country.
The actual amount changes from year to year. The amount in 2024 was $120,000 and the amount for 2025 is $126,500. It is adjusted every year for inflation and should be checked every year.
Here's an example of how this works: Say you make $135,000 annually when everything is converted into dollar amounts. Most expatriates will pay the full tax on that in their working country. To put a number on that, let's say it's $25,000.
Nothing like a weekend crunching those numbers. (
Ken Teegardin
/ Flickr)
But the United States also wants a slice of that, unlike other countries. The current foreign earned income exclusion is $126,500. So subtract that number from $135,000, and that means Uncle Sam calls dibs on the remaining $8,500 of earned income.
That's in addition to the $25,000 you already paid in taxes to whatever country you live in.
On the bright side, this is technically a rich person's problem.
If you make lower than the threshold, then that's something not necessary to worry about. In fact, many times, especially when negotiating with a company, it can be a great idea to negotiate a salary down and account for possible currency fluctuations (especially if the country's currency you're living in is not fixed to the U.S. dollar).
Additionally, U.S. expats may have to report their foreign bank accounts under the Foreign Bank Account Report (FBAR) and comply with the Foreign Account Tax Compliance Act (FATCA) regulations.
(If you have a business, passive foreign investment companies [PFICs] and foreign mutual funds require special reporting on tax forms.)
Qualifying for the foreign tax credit is a good thing.
The IRS states there are one of three ways to qualify for the foreign earned income exclusion:
- A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year
- A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year
- A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
To sum it up, 1) and 2) basically means an American citizen or resident who has held proper residency or visa paperwork in another country for an entire year or 3) someone who's actually been out of the country for eleven out of the twelve months of the year.
The physical presence test can be a great tool for digital nomads to qualify for tax exemptions. Just beware those social security taxes on those income tax returns.
These are all great reasons to pursue legitimate work abroad and to be out of the country for, um, the financial benefits.
