For most people in the world, moving abroad means leaving their old tax obligations behind.
For Americans, it’s not so simple.
The United States is one of only two countries (the other is Eritrea) that taxes its citizens on worldwide income, no matter where they live.
That means if you’re a U.S. citizen living in Spain, Thailand, or Dubai, Uncle Sam still wants to know how much you earn,and may want a piece of it.
The problem? You might also be required to pay taxes in your new country of residence.
If you’re not careful, you could end up paying tax twice on the same income.
The good news is there are legal ways to minimize,or even eliminate,this “double taxation” trap.
1. Understand How Double Taxation Happens
Double taxation occurs when two countries both claim taxing rights over your income.
For example:
- You’re a U.S. citizen working remotely in Germany.
- Germany taxes your salary because you live and work there.
- The U.S. also taxes you because you’re a U.S. citizen.
Result: You owe taxes to both countries,unless you use the right legal tools.
2. Use the Foreign Earned Income Exclusion (FEIE)
The FEIE is the most famous way Americans abroad avoid U.S. tax on salary or self-employment income.
In 2025, it lets you exclude up to $126,500 of foreign-earned income from U.S. taxes.
Requirements:
You must meet either:
- Physical Presence Test – Live outside the U.S. for at least 330 full days in a 12-month period.
- Bona Fide Residence Test – Prove you’re a legitimate resident of a foreign country (usually for an entire tax year).
Example:
If you earn $100,000 in Spain and meet the FEIE requirements, that income can be completely excluded from U.S. taxation,though you may still owe Spanish taxes.
3. Claim the Foreign Tax Credit (FTC)
The Foreign Tax Credit lets you offset your U.S. tax bill with taxes you’ve already paid abroad.
It’s especially useful if you live in a high-tax country where the tax rate is higher than in the U.S.
Example:
- You owe $20,000 in taxes to France on your $100,000 salary.
- You also owe $18,000 in U.S. taxes on that same income.
- With the FTC, the $20,000 paid to France can wipe out your U.S. tax liability completely.
Tip: You can use the FEIE and the FTC together, but you can’t apply both to the same income.
4. Check for a Tax Treaty
The U.S. has tax treaties with more than 60 countries to prevent double taxation and clarify tax rules for cross-border situations.
These treaties may reduce or eliminate certain taxes, especially for:
- Pensions & Social Security
- Dividends, interest, and royalties
- Business income
Note: Treaties are not a magic bullet,they don’t override the U.S. citizenship-based taxation system, but they can help in specific situations.
5. Consider Foreign Housing Exclusions/Deductions
If you live in an expensive city abroad, the IRS allows an additional Foreign Housing Exclusion (for employees) or Deduction (for self-employed individuals).
This can further reduce your U.S. taxable income if your rent and utilities are high.
6. Don’t Forget State Taxes
Even if you’ve left the U.S., some states (like California, New York, and Virginia) are notoriously aggressive about claiming you still owe them taxes.
To cut ties:
- Give up your state driver’s license.
- Close state bank accounts if possible.
- Register to vote as “overseas” or in a no-income-tax state like Florida or Texas.
7. File Every Year—Even If You Owe $0
This is where many Americans abroad get into trouble.
Even if the FEIE or FTC reduces your U.S. tax bill to zero, you still must file your U.S. tax return annually.
Failing to file can mean heavy penalties and back taxes.
You may also have to file:
- FBAR (Report of Foreign Bank Accounts) if your total foreign accounts exceed $10,000 at any time in the year.
- FATCA Form 8938 if your foreign assets pass certain thresholds.
8. Plan Before You Move
Tax optimization works best when done before you relocate.
For example:
- Choosing a country with no income tax (like the UAE) can make the FTC irrelevant because there’s no foreign tax to credit,making FEIE your main shield.
- Moving to a high-tax country might make the FTC more valuable than FEIE.
Key Takeaways
- The U.S. taxes citizens abroad on worldwide income.
- Double taxation can be avoided using tools like the FEIE, FTC, housing exclusions, and tax treaties.
- Always file your return,even if you owe nothing.
- State tax rules can be just as tricky as federal ones.
- Proper planning before you move is the smartest way to avoid tax headaches.
Final Word
Paying tax once is annoying.
Paying it twice is financial self-sabotage.
If you’re serious about building a life abroad while keeping your hard-earned money, understand the rules before you board that plane.
With the right strategy, you can live the expat dream without financing two governments at once.
