Income Earned Abroad

A US citizen or green-card holder is taxed on worldwide income, regardless of where it is earned or where it is taxed locally. Two distinct provisions address the double-taxation problem: the foreign earned income exclusion (FEIE) under IRC §911, “Citizens or residents of the United States living abroad”, and the foreign tax credit (FTC) under IRC §901, “Taxes of foreign countries and of possessions of the United States”. They solve different problems, and the choice between them is often the largest single tax decision for a US expatriate.

The exclusion. The FEIE excludes a slice of foreign earned income from US taxable income: $132,900 for 2026 (annually inflation-indexed). To qualify, you must have a foreign tax home and either spend 330 full days of any 12-month period outside the United States (the “physical presence” test) or be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. Housing costs above a base amount are separately excludable under the housing exclusion or deduction (capped, with city-specific high-cost adjustments published annually). The exclusion applies only to earned income — wages, self-employment — and not to investment income, pensions, or capital gains.

Do not assume the excess comes back at the bottom of the rate schedule. IRC §911(f) imposes a stacking rule: tax on your non-excluded income is computed at the rates that would have applied had the excluded income been included, so the first dollar above the ceiling is taxed at your would-be marginal rate, not at 10%. The exclusion removes income from the base; it does not reset the brackets. For an expatriate earning well above $132,900 the FEIE is therefore worth far less than the headline number suggests, which is exactly why the credit usually wins below.

The credit. The FTC instead lets you credit foreign income tax paid against the US tax on the same income, dollar for dollar up to the US tax that would otherwise apply. The credit covers all categories of income, not merely earned wages. Excess credit can be carried back one year and forward ten. Filed on Form 1116, “Foreign Tax Credit (Individual, Estate, or Trust)” for individuals.

Choosing. The decision is mechanical once you know your facts:

• If your foreign country has a higher effective tax rate than the US (most of Western Europe, Canada, Australia, Japan), the FTC fully covers your US liability and the FEIE saves nothing while introducing complexity. Take the credit.
• If your foreign country has a lower effective tax rate or none (the Gulf states, Singapore for non-domiciled residents, parts of Eastern Europe), the FEIE is the only meaningful shelter. Take the exclusion — and consider whether to elect into a partial-year FEIE plus FTC mix on the residual income above the exclusion cap.
• The two cannot be stacked on the same dollar of income, but they can be split across categories: FEIE on earned income up to the cap, FTC on investment income and on earned income above the cap. The interaction with the housing exclusion, with self-employment tax (which the FEIE does not reduce — you still owe US SE tax on the excluded income unless a totalization agreement applies), and with state residency (section “Domicile and the Conversion Year”) turns the calculation into a multi-page spreadsheet for any substantial expatriate income.

A US citizen abroad files Form 1040 every year regardless of how little US-source income they have, and must also file FinCEN Form 114 (FBAR) for foreign accounts aggregating over $10,000 at any point during the year, and Form 8938, “Statement of Specified Foreign Financial Assets” under Foreign Account Tax Compliance Act (FATCA) once specified foreign assets exceed $50,000 ($100,000 joint) at year-end for a U.S. resident, or $200,000 ($400,000 joint) for a taxpayer living abroad. The reporting is independent of any tax owed. The non-willful FBAR penalty is $10,000 (inflation-adjusted) per report, not per account — the Supreme Court settled that in Bittner v. United States, 598 U.S. 85 (2023), rejecting the government’s per-account reading that would have turned one late form listing sixty accounts into a six-hundred-thousand-dollar penalty. Willful violations are far higher and uncapped by Bittner: the greater of $100,000 (adjusted) or 50% of the account balance, per year.

Renouncing citizenship ( IRC §877A, “Tax responsibilities of expatriation”) is the only complete exit, and it is expensive by design. You are a covered expatriate, and subject to the mark-to-market exit tax, if any of three prongs is met: net worth of $2 million or more, average annual net income tax over the five preceding years above $211,000 (2026, indexed), or failure to certify five years of tax compliance. The deemed sale of your worldwide assets is reduced by an exclusion of $910,000 for 2026 — against a nine-figure balance sheet, a rounding error.