US Taxes for Expats: What Everyone Gets Wrong

Most US expat tax mistakes don’t start with obscure tax law. They start with assumptions that sound completely reasonable.

Take Rachel, an American who has lived in Spain for four years. Her employer is Spanish, she pays Spanish income tax, her savings are in local banks, and she hasn’t earned a dollar from a US employer in years.

“I don’t earn anything in America, so I don’t need to file there”

Living and earning money abroad doesn’t automatically end a US citizen’s federal tax filing obligations.

US citizens and resident aliens abroad are generally subject to US income tax on their worldwide income, and the usual filing rules continue to apply. Rachel’s Spanish salary therefore doesn’t disappear from the US tax picture simply because it was earned outside America.

Here’s the distinction that gets lost surprisingly often: filing a US return and owing US tax are not the same thing.

An expat can have a filing requirement while ultimately owing little or no additional US income tax.

“I already pay foreign tax, so I can’t owe the IRS”

Foreign taxes can reduce US tax, but paying tax overseas doesn’t automatically settle the American side.

Rachel may be able to claim a Foreign Tax Credit for qualifying Spanish income taxes. Alternatively, eligible Americans can use the Foreign Earned Income Exclusion (FEIE) for qualifying foreign earnings.

These aren’t interchangeable magic buttons, though.

For example, foreign taxes attributable to income excluded through the FEIE generally can’t also be claimed as a foreign tax credit. The best approach depends on the person’s income and wider circumstances.

“Every expat gets their first $130,000 tax-free”

The $130,000 FEIE for 2025 isn’t an automatic tax-free allowance simply for living overseas.

For the 2025 tax year, $130,000 is the maximum foreign earned income exclusion per qualifying person. To qualify, a taxpayer must meet requirements involving a foreign tax home and either the bona fide residence test or physical presence test. The income must also qualify as foreign earned income.

Rachel also has to claim the exclusion on her US return.

And that word earned matters. The FEIE isn’t a blanket $130,000 exclusion covering pensions, investment returns, capital gains and every other type of foreign income.

“FBAR only matters if one account has more than $10,000”

The FBAR threshold generally applies to your foreign accounts collectively, not $10,000 per account.

Suppose Rachel has €8,000 in checking, €7,000 in savings, and €5,000 in a joint account.

A US person generally has an FBAR filing requirement when the aggregate value of their reportable foreign financial accounts exceeds $10,000 at any time during the calendar year.

None of Rachel’s accounts needs to exceed $10,000 individually. And an FBAR isn’t a tax on those balances. It’s an information-reporting requirement.

“My foreign bank already reports me to the IRS”

Your bank’s FATCA responsibilities don’t replace your own US reporting obligations.

Rachel may remember her Spanish bank asking whether she was a US citizen when she opened her account. It’s easy to think, Well, they already know about me.

But that’s a different piece of the puzzle.

Depending on her circumstances, Rachel may separately need an FBAR and potentially Form 8938, which covers specified foreign financial assets and has its own thresholds. Taxpayers qualifying as living abroad have higher Form 8938 thresholds than taxpayers living in the US.

Your bank reporting information about you isn’t the same as you meeting your own reporting obligations.

“It’s tax-free here, so it’s tax-free in America”

A local tax advantage doesn’t automatically carry over into US tax law. Imagine Rachel buys a locally marketed investment fund because it receives attractive Spanish tax treatment.

The US analysis is separate. Certain foreign corporations can meet the definition of a Passive Foreign Investment Company (PFIC) under US rules, and US shareholders of PFICs may have Form 8621 reporting obligations.

That doesn’t make every overseas investment fund a PFIC. It does make checking the US treatment before investing rather sensible.

“I haven’t filed for years, so I’m automatically in serious trouble”

Several missed filing years need attention, but they don’t by themselves tell you what the appropriate correction route will be.

For some eligible taxpayers outside the US, the IRS’s Streamlined Foreign Offshore Procedures provide a way to address previous failures involving tax returns, foreign income and potentially FBARs when the failures resulted from non-willful conduct. Specific eligibility and certification requirements apply.

Someone in Rachel’s position might therefore seek US tax help overseas before deciding how to deal with earlier years rather than simply filing whatever forms they find online.

The biggest misconception: expat tax is only about tax

For Americans abroad, the amount owed to the IRS is only one part of the picture.

A better sequence of questions is: Do I need to file? What income must I report? Which accounts and assets must I disclose? What tax relief can I claim? And, after all of that, do I actually owe anything?

Once those questions are separated, US expat tax starts looking considerably less mysterious.