Tax fundamentals for foreign residents: Crucial information on taxes when residing away from the United States in 2025
In the 2025 tax year, U.S. citizens and resident aliens living abroad must file Form 1040, reporting their worldwide income, and typically use Form 2555 to claim the Foreign Earned Income Exclusion (FEIE) or the Foreign Tax Credit (FTC).
For the FEIE, expats can exclude up to $130,000 of foreign earned income. To qualify, they must meet either the Physical Presence Test (330 full days abroad in any 12-month period) or the Bona Fide Residence Test (resident of a foreign country for the full tax year). The FEIE can also be used to claim the Foreign Housing Exclusion or Deduction for qualifying housing costs exceeding the base amount of $20,800.
If income exceeds the FEIE limit, expats may still be able to reduce their U.S. tax liability by claiming the FTC using Form 1116. However, the FTC cannot be applied to income excluded under the FEIE; taxpayers must choose between FEIE and FTC for the same income.
Expats are still entitled to the standard deduction, child tax credit, and can contribute to an IRA, assuming they meet the requirements. Self-employed individuals claiming the FEIE still owe self-employment tax.
U.S. citizens and resident aliens must report their global income to the IRS, regardless of location. If income exceeds the standard filing threshold ($15,750 for single filers and $31,500 for married-filing-jointly filers in 2025), a tax return must be filed, even if the FEIE or FTC reduces tax liability to zero.
Expats get an automatic extension to file their tax return by June 15, with an option for further extension to October 15. If they opt not to claim the FEIE, they may be prevented from claiming it for the next 5 years.
This framework ensures U.S. expats comply with IRS rules while using tax benefits designed to avoid double taxation and reduce U.S. tax liability on genuine foreign income. It's essential for expats to understand these rules and seek professional advice to ensure compliance.
[1] IRS.gov - Foreign Earned Income Exclusion and Foreign Housing Expenses [2] IRS.gov - Foreign Tax Credit [3] IRS.gov - Choosing Between the FEIE and the FTC [4] IRS.gov - U.S. Citizens and Resident Aliens Abroad [5] IRS.gov - Foreign Earned Income Exclusion and Tax Credit [6] IRS.gov - Foreign Housing Exclusion and Deduction [7] IRS.gov - Foreign Tax Credit FAQs [8] IRS.gov - Foreign Earned Income Exclusion and Tax Credit FAQs [9] IRS.gov - U.S. Tax Guide for Aliens [10] IRS.gov - Filing and Payment Deadlines for Expats [11] IRS.gov - Self-Employed Individuals and the FEIE [12] IRS.gov - Foreign Earned Income Exclusion and Tax Credit Limits
- To manage their personal finances effectively, expats should be aware that, when residing abroad, they are required to file Form 1040, reporting their worldwide income and potentially utilizing Form 2555 for the Foreign Earned Income Exclusion (FEIE) or the Foreign Tax Credit (FTC).
- Expats who are seeking ways to optimize their personal-finance situation may find the Foreign Housing Exclusion or Deduction particularly useful, provided their qualifying housing costs exceed the base amount, as part of the FEIE.
