Tax Talk Thursdays: Tax Planning for U.S. Citizens Living Abroad

Living abroad can be an exciting chapter in your life, but don’t forget—Uncle Sam still expects a tax return. The U.S. is one of the few countries that taxes its citizens on their worldwide income, regardless of where they reside. But with smart planning, you can minimize your U.S. tax liability and stay compliant.

1. Who Needs to File?

If you’re a U.S. citizen or green card holder and your income exceeds the standard filing threshold, you’re required to file a Form 1040, even if you live abroad and pay foreign taxes. You may also need to file additional forms depending on your financial circumstances.

2. Use the Foreign Earned Income Exclusion (FEIE)

Form 2555 allows qualified taxpayers to exclude up to $130,000 of foreign wages or self-employment income in 2025. To claim this, you must meet either the Physical Presence Test (330 full days outside the U.S. in a 12-month period) or the Bona Fide Residence Test (residency in a foreign country for a full calendar year).

3. Claim the Foreign Tax Credit (FTC)

If you’re paying foreign income taxes, you may be able to offset your U.S. tax using Form 1116. This credit is especially useful when your income doesn’t qualify for the FEIE or exceeds the exclusion limit. However, you generally cannot use the FEIE and FTC on the same income, so strategic planning is essential.

4. Don’t Forget FBAR and FATCA

If your foreign financial accounts exceed $10,000 at any time during the year, you must file an FBAR (FinCEN Form 114). Additionally, if your total foreign assets exceed certain thresholds (e.g., $200,000 for single filers living abroad), you must also file Form 8938 under FATCA.

Failing to file these forms can result in steep penalties—even if the omission was unintentional.

5. Own a Foreign Business? Know the Rules

If you own a foreign corporation, partnership, or disregarded entity, you’re subject to additional reporting requirements that are often overlooked:

• Form 5471 – For U.S. shareholders of certain foreign corporations

• Form 8865 – For U.S. partners in foreign partnerships

• Form 8858 – For owners of foreign disregarded entities

• GILTI (Global Intangible Low-Taxed Income) – U.S. persons who own Controlled

• Foreign Corporations (CFCs) may need to include certain earnings even if no distribution was received

  
  

Noncompliance with these rules can trigger steep penalties and unnecessary tax burdens. Structuring your entity properly from the beginning—and filing the right disclosures—is critical.

6. Watch Out for Special Asset Types

Foreign mutual funds, retirement accounts, or trusts may be considered Passive Foreign Investment Companies (PFICs) or foreign trusts, which require complex forms and can result in harsh tax treatment. This may involve:

• Form 8621 – For PFICs

• Forms 3520 and 3520-A – For foreign trusts or large gifts from foreign persons

7. Leverage the Foreign Housing Exclusion

If your housing costs abroad are high, you may also be eligible for the Foreign Housing Exclusion, which can be claimed in conjunction with the FEIE. This can be especially beneficial in high-cost cities like Hong Kong, London, or Tokyo.

8. Don’t Ignore State Tax Ties

Some U.S. states—like California and New York—are known for aggressively pursuing former residents. If you maintain a driver’s license, property, or voter registration in your old state, you could still be considered a tax resident. Formally severing ties can help reduce state tax exposure.

9. Understand Filing Deadlines

U.S. citizens living abroad receive an automatic 2-month extension to file (until June 15), but taxes are still due by April 15. You can request a further extension to October 15 using Form 4868. If you’ve missed prior filings, the Streamlined Filing Compliance Procedures may allow you to catch up without penalties—so long as the failure was non-willful.

Tax planning for U.S. expats requires careful strategy. Whether you're a salaried employee in London, a business owner in Singapore, or a retiree in Portugal, your U.S. tax obligations follow you. MKHS Tax Group specializes in helping Americans abroad reduce their tax burden and stay compliant—so you can focus on your life overseas without IRS worries. Contact us at info@mkhstaxgroup.com if you have any tax questions.