How Do Taxes and Financial Planning Work for Americans Living Abroad?

Living abroad can be an exciting move, whether it’s for work, family, or a change of pace. But while your surroundings may change, your financial responsibilities follow you. Managing money as an expat often means navigating new banking systems, juggling retirement accounts, and keeping track of multiple currencies.

On top of general finances, you’ll need to pay close attention to your taxes. As a U.S. citizen or resident, you’re still required to file a tax return with the IRS, even if your income is earned outside the United States.

You may also face tax obligations in your new country, along with U.S. reporting rules for foreign bank accounts. When all of these concerns add up, it’s easy to see how managing international finances can feel overwhelming.

The good news is that with accurate information, you can handle these requirements with confidence. Understanding how U.S. taxes and financial planning work for Americans living abroad can help you stay on top of your finances and meet your obligations at home and overseas.

In this guide, we will answer the following questions:

Do I Still Need to Pay U.S. Taxes if I Move Abroad?

According to the IRS, if you are a U.S. citizen or a resident alien living outside the United States, your worldwide income might still be subject to U.S. income tax.

This can feel confusing, especially if you are already paying taxes in your new country. Some people worry about being taxed twice or losing access to certain benefits. These concerns are understandable, but in most cases, there are systems in place to reduce your tax burden or help you avoid it altogether, depending on your situation.

The IRS offers several forms of tax relief for individuals living abroad. The two most common options are the foreign earned income exclusion and the foreign tax credit, which can help reduce the amount of U.S. tax you owe. Other forms of tax relief may also be available based on your circumstances.

All in all, certain filings are required for U.S. citizens living abroad no matter what, including the annual tax return and, in some cases, additional documents such as the Foreign Bank Account Report or Form 8938 for foreign financial assets. Failing to file when required can lead to penalties, interest, or in serious cases, restrictions on renewing or obtaining a U.S. passport. With good planning and the right information, however, many of these concerns can be managed successfully.

How Does the Foreign Earned Income Exclusion (FEIE) Work?

The FEIE, allows many U.S. citizens working abroad to reduce their U.S. tax bill by excluding a portion of their foreign earnings. For example, in the 2023 tax year, up to $120,000 of earned income may qualify for exclusion.

To use the FEIE, you must meet either the bona fide residence test or the physical presence test.

You may meet the bona fide residence test if you are a resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. For most people, that means from January 1 through December 31. Luckily, brief trips back to the U.S. generally don’t break the bona fide residence test, as long as you intend to return promptly to your foreign home or establish another one.

The physical presence test, on the other hand, applies if you are outside the United States for at least 330 full days during any 12-month period.

Only earned income qualifies for this exclusion. That includes wages, salaries, or self-employment income, but not things like dividends, rental income, or pensions. You still need to file a U.S. tax return to claim the FEIE, and you must fill out Form 2555 to make it official.

You may also qualify for a housing exclusion that reduces taxable income based on your rent and utilities abroad, which we’ll go over later.

What is the Foreign Tax Credit?

If you are a U.S. taxpayer and pay income taxes to a foreign country or a U.S. territory you might be able to lower your U.S. tax bill by claiming the foreign tax credit. This credit helps stop you from paying tax twice on the same income once to the foreign country and again to the United States.

If you paid taxes to another country, you have two main options. You can take a credit or a deduction. A credit is usually the better choice because it directly reduces the amount of U.S. tax you owe. A deduction only lowers the income that gets taxed, which usually saves you less.

If you’re an individual and want to claim the credit, you’ll need to file IRS Form 1116 with your tax return. Businesses use a different form called Form 1118. Make sure to keep good records of the foreign taxes you paid so you have everything ready.

Since the foreign tax credit rules can get a little tricky, it’s a smart idea to talk with a tax expert or check the IRS website to make sure you’re doing it right.

How Does the Foreign Housing Exclusion or Deduction Work?

The foreign housing exclusion or deduction can reduce your taxable income if you live abroad and pay for housing. It covers common living expenses such as rent and utilities. Only the portion of your housing expenses that goes above a base amount set by the IRS may be excluded or deducted.

In 2024, the base housing amount is about $20,240 for someone who has lived abroad the entire year. You can only exclude housing expenses that exceed this amount. If your housing costs are less than the base amount, this benefit won’t work for you.

For example, if you earn $95,000 in wages and pay $2,000 each month for rent, your yearly housing total is $24,000. Subtracting the base amount leaves $3,760. That amount may be excluded from your taxable income. So instead of reporting $95,000, you would subtract $3,760 and only report $91,240.

On the other hand, if your housing expenses are lower than the IRS base amount, you wouldn’t qualify for the exclusion. For example, if you spend only $1,500 per month on housing, your yearly total would be $18,000, which falls below the minimum requirement.

To use the housing exclusion or deduction, your tax home must be in a foreign country. You must also meet either the bona fide residence test or the physical presence test. This information will then be reported on IRS Form 2555 when you file your taxes.

Do You Still Have to Pay U.S. Self-Employment Taxes?

If you’re self-employed, you’re still required to pay U.S. self-employment taxes, which cover Social Security and Medicare.

The FEIE does not exempt you from these taxes. However, some countries have totalization agreements with the U.S., which prevent remote workers from paying into both systems. If you’re in a country with such an agreement, you may be able to contribute only to that country’s social security system instead of the U.S.

Among the countries with these agreements, some of the most popular destinations for American expats include Canada, the United Kingdom, Spain, France, and Australia.

Should You Open a Local Bank Account While Living Abroad?

If you plan to stay abroad for an extended time, opening a local bank account is often a smart move. It can make everyday financial tasks much easier, such as paying bills, receiving local payments, and transferring money without high fees. Many local banks offer convenient services like debit cards, online banking in the local language, and access to ATMs with lower withdrawal fees.

Having a local bank account can also help with practical matters. For example, landlords, utility companies, and even some employers may require local banking details for rent payments, bills, or salary deposits. This can smooth your transition and make managing your finances less stressful.

However, there are some things to keep in mind. While it’s convenient to keep money in a local account for daily expenses, it’s usually wise to avoid holding large amounts of money there. This is especially true if the country’s banking system is unstable or if the local currency is subject to wide fluctuations, which could affect the value of your savings.

Also, be aware of reporting requirements like the U.S. Foreign Bank Account Report (FBAR) if your foreign accounts exceed certain thresholds. Failing to report can lead to significant penalties.

What Documents Will I Need to Open a Foreign Bank Account?

Opening a bank account in a foreign country usually requires some specific documents. While requirements can vary depending on the country and the bank, here are the most common documents you might need to provide:

• Valid passport to prove your identity
  Proof of residence in the foreign country, such as a utility bill, rental agreement, or local ID
• Visa or residence permit showing your legal status abroad
• Tax identification number from your home country or the country where you are opening the account
• Employment or income verification sometimes requested to confirm your source of funds
• Initial deposit as some banks require a minimum deposit to open the account

It is a good idea to check with the specific bank beforehand so you can prepare all necessary paperwork. Some banks may have extra requirements or offer special accounts designed for expats. Having your documents organized and ready can make the process smoother and faster.

Will I Need My Documents Translated?

Depending on the country where you are opening a foreign bank account, you may need to provide some documents in the local language. Many banks require official translations of your documents to process your application, especially for important papers like your passport, proof of residence, or visa.

Beyond documents needed for banking, you may also need translations of documents for immigration purposes such as birth certificates, diplomas, or professional licenses.

If you need help translating any of these documents, feel free to contact us and order translations through our online store.

What is the Report of Foreign Bank and Financial Accounts (FBAR)?

If you are a U.S. citizen or resident with money in foreign bank accounts, and the total value goes over $10,000 at any point during the year, you need to file the FBAR. This report helps keep your finances transparent and makes sure the U.S. government knows where money is held around the world.

Filing is done online through FinCEN’s BSA E-Filing System, not with your regular tax return. The deadline is April 15 for the previous year, but if you need more time, there is an automatic extension until October 15 so there’s no need to ask for it. Sometimes, if a natural disaster happens or for certain financial workers, extra time might be granted.

How Do I Exchange Money While Living Abroad?

If you need to change your money into the local currency, you have a few options and some are better than others.

Firstly, avoid airport exchange counters and tourist areas. These places often give you poor exchange rates and extra fees. Local banks or official currency exchange offices usually offer better rates, but they can still charge commission.

A simpler and often cheaper way is to use an online multi-currency account service like Wise or Revolut. These apps let you move money from your home currency to the local currency at rates that are much closer to what banks actually use between themselves. Here’s how it works:

You transfer money from your U.S. bank account or debit card into your Wise, Revolut, or similar online banking account. Then, you convert it inside the app to the currency you need. You can either:

• Transfer it to a local bank account
• Use the debit card provided by your online bank to spend or withdraw local money

This often allows you to skip traditional exchange fees and gives you more control over your money. It’s basically like sending money to yourself, but in the currency you need.

Finally, if you need cash while living abroad, simply using an ATM is often one of the easiest ways to get it. A debit card from a bank that keeps international fees low can save you money. When the ATM asks which currency to charge, picking the local currency usually gives you a better deal and helps you avoid extra charges.

Can You Contribute to U.S.-Based IRAs or 401(k)s While Living Abroad?

If you have U.S.-based retirement accounts like IRAs or 401(k)s, you might wonder how moving abroad affects your ability to contribute and manage these accounts. The good news is you can usually keep your existing accounts and continue growing your savings even while living overseas.

Can You Contribute to IRAs While Living Abroad?

You can usually keep contributing to a Traditional or Roth IRA while living abroad, as long as you have enough earned income that qualifies under IRS rules. This means you need to have income from a job or self-employment, whether that work is for a U.S. company or a foreign one.

The key is that your income must be reported on your U.S. tax return. Even while living overseas, contributing to an IRA can be a smart way to keep building your retirement savings. These accounts offer long-term growth and tax advantages, helping you stay on track with your financial goals no matter where you live.

Can You Contribute to 401(k) Plans While Living Abroad?

Your 401(k) is linked to your U.S. employment, so you can keep the account after you move abroad. It will keep growing based on your investments with the U.S.-based provider, and you do not need to close it.

However, making new contributions is generally only possible if you are still employed by a U.S. company and paid through a U.S. payroll, even if you live abroad. If you work for a foreign employer, you usually cannot contribute to your old 401(k).

If contributing to your 401(k) is no longer an option, rolling it over into an IRA might be a smart move. IRAs often provide more investment options and easier management for expats.

Can You Withdraw from Your 401(k) When Living Overseas?

The good news is you can still take money out of your 401(k) no matter where you live and U.S. tax rules apply just the same. For example, if you take money out before you turn 59½, you’ll usually owe a 10 percent penalty plus regular income tax. After 59½, you can withdraw without the penalty, but you’ll still pay regular income tax. Once you reach 73, you’ll need to start taking required minimum distributions, unless you’re still working.

Keep in mind the country where you live may also tax your 401(k) withdrawals. The good news is that many countries have tax treaties with the US to help prevent you from paying taxes twice. Since rules can vary a lot, you may need to file extra forms like the Foreign Tax Credit or claim treaty benefits to make sure you are not overpaying.

What About the Foreign Earned Income Exclusion?

The FEIE helps many expats exclude a large amount of earned income from U.S. tax, but it does not apply to retirement income like 401(k) distributions. The IRS treats this income differently, so expect to pay U.S. tax on it even if you live abroad.

Do State Taxes Still Apply?

Don’t forget about your last U.S. state of residence. Some states tax retirement income and may still consider you a resident for tax purposes unless you officially change your domicile. States like California and New York are known for strict residency rules, which can lead to unexpected taxes.

On the other hand, states such as Florida, Nevada, and Wyoming do not tax retirement income and are popular choices for people looking to avoid state income taxes. Planning ahead and formally establishing your domicile in one of these states can help reduce your tax burden while living abroad.

Should I Hire a Tax Professional While Living Abroad?

Handling your own taxes might work fine if your situation is simple. But once you are dealing with income from more than one country, self-employment, rental properties, or dual citizenship, it can get complicated fast.

United States tax laws for people living abroad are full of rules that are not always easy to follow, and making a mistake can cost you. Thus, if you are not sure how to report foreign accounts, claim credits, or follow local tax laws, it might be wise to hire some help.

Not every accountant is the right fit. Look for someone who understands international tax rules and works with people living outside the United States.

Additionally, some tax services, like Bright Tax or Greenback Expat Tax Services focus on helping Americans who live abroad and know how to keep you in line with the law without making things harder for you.

Closing Thoughts

Managing U.S. taxes and financial planning while living abroad may seem complex at first, but it is entirely achievable with the right knowledge and preparation. Understanding key rules like the FEIE, reporting foreign bank accounts, and handling retirement savings can make a big difference in staying compliant and making the most of your finances.

Each country and individual situation is unique, so taking the time to learn what applies to you and seeking professional advice when needed can provide confidence and peace of mind. Staying organized and proactive with your tax responsibilities shows you are serious about managing your financial life both at home and overseas.

Be sure to check out our next article, where we will explore healthcare and insurance considerations for Americans working abroad. We’ll cover what you need to know to access care and protect yourself no matter where your journey takes you.

Author: Aaron Randolph | LinkedIn