U.S. Taxation of Income Earned Abroad: A Guide for U.S. Citizens and Green Card Holders

U.S. citizens and green card holders (lawful permanent residents) are taxed on their worldwide income, regardless of where they live or work. This fundamental rule comes directly from the Internal Revenue Code and is explained in IRS Publications 54 and 519. Moving abroad does not automatically end your U.S. tax obligations.

Three Common Scenarios and How U.S. Tax Treatment Differs

1. Working for a foreign company while living in the United States
   Income from services performed inside the U.S. is U.S.-source income. It is fully taxable in the United States. The Foreign Earned Income Exclusion (FEIE) is not available because the work was not performed in a foreign country.
2. Working for a foreign company after moving abroad (as a U.S. citizen or green card holder)
   Income from personal services performed in a foreign country is foreign earned income. You may qualify for the FEIE or Foreign Tax Credit if you meet the eligibility tests (see below).
3. Working for a U.S. company while living and working in another country
   The same rules apply as in scenario 2. The nationality of the employer does not matter. What matters is where the services are performed. Pay received from a U.S. employer for work done abroad is generally foreign earned income and can qualify for the FEIE (except for most U.S. government pay).

Foreign Earned Income Exclusion (FEIE) vs. Foreign Tax Credit (FTC)

Foreign Earned Income Exclusion (FEIE)

You may exclude a portion of your foreign earned income from U.S. taxable income if you have a tax home in a foreign country and meet either (more info about these tests link):

• The bona fide residence test (you are a bona fide resident of a foreign country for an uninterrupted full tax year), or
• The physical presence test (you are physically present in a foreign country or countries for at least 330 full days during any 12 consecutive months that includes part of the tax year).

You claim the FEIE on Form 2555, attached to Form 1040. The maximum exclusion is adjusted annually for inflation. For tax year 2025 it is $130,000 per person; for tax year 2026 it is $132,900 per person. The exclusion is prorated if you qualify for only part of the year. You may also exclude or deduct certain foreign housing costs (subject to separate limits).

Foreign Tax Credit (FTC)

If you pay or accrue foreign income taxes on foreign-source income, you may claim a credit against your U.S. tax liability. You claim the FTC on Form 1116. The credit is limited to the U.S. tax that would be due on your foreign-source income (computed separately for different categories of income). Unused credits can generally be carried back 1 year or forward 10 years.

Key differences and when one is better than the other

• You cannot claim the FTC on income that you exclude under the FEIE.
• If your foreign tax rate is low, the FEIE is usually more beneficial because it removes the income from U.S. tax entirely (up to the limit).
• If your foreign tax rate is high (higher than your U.S. effective rate), it is often better not to claim the FEIE and instead claim the FTC on the full amount of foreign income. The credit can eliminate or greatly reduce the U.S. tax on that income.
• In some cases you can combine them: exclude up to the FEIE limit and claim the FTC on the excess income (and on the foreign taxes paid on the excluded portion, if any, after proper allocation).

You must choose one approach or the other each year (or a combination where allowed). The choice is made on your timely filed return (including extensions).

The Election and the 5-Year Rule for Re-Election

Once you make the FEIE election by filing Form 2555, it remains in effect for that year and all future years unless you revoke it. To revoke the election, attach a signed statement to your return (or amended return) for the first year you no longer want to claim it.

Important: If you revoke the election, you generally cannot claim the FEIE again for the next 5 tax years unless the IRS grants you permission. This is a strict rule designed to prevent frequent switching between the exclusion and the credit.

Green Card Expiration Does Not End Your U.S. Tax Obligations

If you are a green card holder and move abroad, the simple expiration of your green card does not end your status as a resident alien for U.S. tax purposes. You remain a resident alien—and therefore subject to U.S. tax on worldwide income—until you formally abandon your lawful permanent resident status (typically by filing Form I-407 with USCIS and providing proof of receipt to the IRS) or your status is otherwise terminated by final administrative or judicial order.

U.S. citizens remain subject to U.S. tax on worldwide income for life unless they formally renounce U.S. citizenship (in which case special expatriation rules and Form 8854 may apply).

Additional Reporting Requirements

Even if you qualify for the FEIE or FTC, you may have other U.S. reporting obligations:

• FBAR (FinCEN Form 114 – Report of Foreign Bank and Financial Accounts): You must file electronically with FinCEN if the aggregate value of your foreign financial accounts exceeded $10,000 at any time during the calendar year. This is a separate filing from your income tax return.
• Form 8938 – Statement of Specified Foreign Financial Assets
  You must file this form with your Form 1040 (or other applicable income tax return) if you are a specified individual with an interest in specified foreign financial assets and the total value of those assets exceeds the applicable reporting threshold.
  
  The thresholds differ based on two main factors: your filing status (e.g., unmarried/single, married filing jointly, married filing separately) and whether you live in the United States or live abroad (and qualify under the "living abroad" rules).
  
  Living abroad for Form 8938 purposes means your tax home is in a foreign country and you meet one of the following:
  • You are a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year, or
  • You are physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months that ends in the tax year (this is the same physical presence test used for the Foreign Earned Income Exclusion).
  
  These tests are applied per the instructions for Form 8938 and Publication 54. Importantly, simply earning income abroad (while living in the U.S.) does not qualify you for the higher "living abroad" thresholds — you must actually meet the residence or presence test above.
  
  Current reporting thresholds (as per IRS instructions and official guidance):
  If you live in the United States:
  • Unmarried (or married filing separately): More than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
  • Married filing jointly: More than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.
  
  If you live abroad (and meet the bona fide residence or physical presence test):
  • Unmarried (or married filing separately): More than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.
  • Married filing jointly: More than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year.
  
  The thresholds are checked using two separate tests:
  • The value on the last day of the tax year, and
  • The maximum value at any time during the tax year.
  You file Form 8938 if either test is exceeded for your situation. These amounts are not adjusted annually for inflation and have remained consistent in recent IRS instructions (including revisions through 2025–2026).
  
  For the most up-to-date details, refer directly to the Instructions for Form 8938 on IRS.gov (search for "Instructions for Form 8938") or the page "Do I need to file Form 8938?" under the corporations section on IRS.gov. The rules apply regardless of whether your foreign income is excluded under FEIE — Form 8938 is a separate reporting requirement for asset disclosure.
• Form 8858 – Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches: U.S. citizens and resident aliens must file Form 8858 (and Schedule M if required) if they are the tax owner (directly or indirectly) of a foreign disregarded entity or operate a foreign branch that meets the filing criteria. This form provides the IRS with information about the income, assets, and transactions of the foreign entity or branch.

Conclusion

Living and working abroad can reduce your U.S. tax burden through the FEIE or FTC, but the rules are complex and the choices you make (especially the FEIE election) have long-term consequences. Always review the most current IRS Publications 54, 514, and 519, and the instructions for Forms 2555, 1116, 8938, and 8858 before filing. The information above is based solely on official IRS publications and forms as of February 2026.