What Is an Expat? Why U.S. Citizens Living Abroad Still Pay Taxes (And How to Pay Less)

An expat is just an American living outside the U.S. – but the IRS? They don’t care where you live. You still owe taxes on every dollar you make.

I know, it’s nuts.

You’re sitting in a café in Barcelona, haven’t been to the States in three years, and somehow Uncle Sam still wants his cut. Here’s the kicker: America is one of only TWO countries on the entire planet that does this.

But wait – before you panic about that teaching salary in Japan or consulting gig in Dubai – there’s actually good news. You can legally exclude up to $130,000 of foreign income. Yeah, you read that right. Problem is, most people have no clue this exists.

I’ve been doing expat taxes for 12 years now, helped probably 500+ Americans living abroad, and I’d say… 9 out of 10 were massively overpaying when they first called me. Just last week, this teacher in Singapore – sweet lady, been there 6 years – finds out she’s been leaving fifteen grand on the table. Every. Single. Year.

(She wasn’t happy. Can’t blame her.)

So whether you’re a digital nomad bouncing around Bali, retired in Costa Rica, or pulling six figures at some corporate job in London, let me break down exactly what you need to know.

Because honestly? The rules are confusing, but once you get it, you’ll sleep a lot better.

Key Takeaways:

• Most expats overpay by thousands because they DIY their taxes or use a regular CPA
• You owe U.S. taxes no matter where you live (yeah, even after 20 years abroad)
• The Foreign Earned Income Exclusion is your best friend – excludes up to $130,000 in 2025
• Miss FBAR reporting? Penalties start at $12,500 (for an honest mistake!)
• Double taxation is NOT inevitable – between FEIE and foreign tax credits, you can often pay zero

So What Exactly Is an Expat? (It’s Not What Most People Think)

Okay, let’s clear this up because people get confused about this all the time.

An expat – short for expatriate – is basically any U.S. citizen or green card holder who lives outside the United States. Period. Doesn’t matter if you’ve been gone six months or sixteen years. Still got that blue passport? You’re an expat.

Now here’s where it gets interesting (and where people mess up):

You’re NOT the same as an immigrant. See, immigrants move TO a new country and usually want citizenship there.

Expats? We move FROM our home country but keep our original citizenship. Big difference – especially when tax time rolls around.

Types of people who are expats:

• That software developer working remotely from Mexico City? Expat.
• Your aunt who retired to a beach house in Portugal? Also an expat.
• College kid teaching English in South Korea for a year? Yep, expat.
• Military contractor in the Middle East? Expat (with some special tax rules).
• Digital nomad living out of a backpack? Still counts.

Here’s the thing that trips people up: According to the IRS, you don’t have to be gone forever to be an expat. You could be on a 6-month assignment in Toronto and – boom – you’ve got expat tax issues to deal with.

I had this client once, guy thought because he was only in Germany for 18 months on a work project, he didn’t count as an expat. Wrong. Cost him about $8,000 in missed deductions. Don’t be that guy.

Quick reality check: Being an expat doesn’t mean you’ve abandoned America or renounced your citizenship (that’s a whole different can of worms we’ll get to later). It just means you live somewhere else. But in the eyes of the IRS? You’re still as American as apple pie—and they want their slice.

Why Do I Have to Pay U.S. Taxes If I Live Abroad?

Because America taxes based on citizenship, not residence.

Let me put this in perspective: You could move to Thailand tomorrow, live there for 30 years, never once return to the U.S., and the IRS still expects you to file taxes every April. It’s like having a gym membership you can’t cancel even though you moved to another continent.

We’re literally one of only TWO countries that do this. The other one? Eritrea. That’s it. That’s the list.

(Fun fact: Even Eritrea only charges 2%. We charge up to 37%.)

Here’s how backwards this is: A French citizen living in New York? Doesn’t pay taxes to France. A Japanese executive in California? Japan doesn’t care. But you, an American teacher in Seoul making $40,000 a year? Better have those forms ready.

The official reason – and I’m not making this up – is that U.S. citizenship comes with “benefits” no matter where you are. Like what, exactly? The ability to evacuate from a war zone? (Good luck with that.) Access to U.S. consulates? (Ever tried getting an appointment?)

The real-world impact:

• You report ALL income – your foreign salary, that side hustle, even interest from your local bank
• Filing is mandatory – even if you owe zero taxes, you still have to file (or face penalties)
• State taxes might apply too – California and New York are particularly aggressive about this
• Your foreign retirement accounts? Yep, those count too

Look, I’m not saying it’s fair. It’s not. But it’s reality. And trust me, the IRS has gotten really good at finding expats who don’t file. Foreign banks now report American account holders (thanks, FATCA), and penalties for “forgetting” to file can wipe out your savings.

The silver lining? Once you know the rules, you can work the system. That’s where things like the Foreign Earned Income Exclusion come in – which we’ll get to next.

(Spoiler: It’s the reason most of my clients end up owing zero to the IRS.)

How the Foreign Earned Income Exclusion Actually Works (Your $130,000 Golden Ticket)

Alright, here’s where it gets good.

The Foreign Earned Income Exclusion – FEIE if you want to sound like you know what you’re talking about – lets you exclude up to $130,000 of foreign-earned income from U.S. taxes in 2025. Not reduce. Not defer. EXCLUDE.

As in, the IRS pretends that money doesn’t exist.

I’ll never forget this client’s face when I explained this. Software engineer in Berlin, making €95,000, had been paying full U.S. taxes for three years because his buddy told him “expats don’t get breaks.” His buddy was wrong. Dead wrong. We filed amended returns and got him back twenty-eight thousand dollars.

Here’s the catch (because there’s always a catch) – you need to qualify using one of two tests:

Physical Presence Test – The easier one

• Be outside the U.S. for 330 full days in any 12-month period
• Not 330 “days” – 330 FULL days (yes, they count hours)
• That weekend trip to Miami? Just cost you two days

Bona Fide Residence Test – The complicated one

• Prove you’re a legitimate resident of a foreign country
• Usually need a full tax year abroad
• Requires things like local tax filings, residence permits, “intent” to stay

Most people use the 330-day test. It’s cleaner. But here’s what drives me crazy—people mess this up constantly. They’ll count wrong, forget about layovers, or think “close enough” works with the IRS.

It doesn’t.

What counts as “earned income”:

• ✅ Your salary or wages
• ✅ Self-employment income (freelancing, consulting)
• ✅ Bonuses and commissions
• ❌ Investment income (sorry, your crypto gains don’t count)
• ❌ Rental income
• ❌ Pension or retirement distributions

And before you ask – no, you can’t exclude your spouse’s income on your return. They need their own FEIE. (I know, I know. The IRS isn’t big on sharing.)

Pro tip nobody tells you: Start tracking your days NOW. Use an app, spreadsheet, whatever. Because trying to reconstruct 18 months of travel from memory and credit card statements? That’s a nightmare you don’t want. Trust me on this one.

FBAR & FATCA: The Banking Reports That Can Ruin Your Life (Yes, Really)

Okay, deep breath. This is the part where people’s eyes usually glaze over, but stick with me because this is where the IRS gets nasty.

FBAR and FATCA are basically the government’s way of making sure you’re not hiding money in Swiss bank accounts like some Bond villain. Except they apply to your totally normal checking account at Barclays or that savings account you opened at DBS in Singapore.

Let me tell you about Sarah (not her real name, obviously). She had $11,000 in her Japanese bank account – her life savings. Never filed an FBAR because she didn’t know it existed. The penalty? $12,500.

The penalty was more than her entire account balance.

FBAR (Foreign Bank Account Report) – The $10,000 Trap

Here’s the deal: If your foreign accounts hit $10,000 total at ANY point during the year – even for one day – you need to file.

And when I say “total,” I mean TOTAL:

• Your checking account in London: $4,000
• Savings account in the same bank: $3,000
• That old account in Canada you forgot about: $3,500
• Total: $10,500 = You need to file FBAR

Doesn’t matter if it drops to $5,000 the next day. That one moment at $10,000? You’re filing.

The form itself (FinCEN 114) isn’t even that hard. Takes maybe 20 minutes. But the penalties for “forgetting”? They START at $12,500 for non-willful violations. Willful? Try $129,210 or 50% of your account balance – whichever hurts more.

(I’m not trying to scare you. Actually, scratch that—I am. This is scary stuff.)

FATCA (Form 8938) – The Bigger Brother

This one’s worse. If you’re living abroad and have foreign assets over $200,000 (or $300,000 for married couples), you need to file Form 8938 WITH your tax return.

“Assets” includes:

• Bank accounts (yes, again)
• Foreign stocks or securities
• Interests in foreign businesses
• Some foreign pension plans
• That rental property in Mexico

Here’s where people screw up: They think FBAR and FATCA are the same thing. They’re not. You might need to file both. Or one. Or neither. Depends on your situation.

I had a client last year – retired engineer, smart guy – figured since he filed FBAR, he was covered. Nope. Missed FATCA for three years. The penalties were… let’s just say he’s not retiring as early as planned.

The good news? If you’ve been filing your tax returns and just missed these forms, there are programs to fix it without massive penalties. But you’ve got to come forward before they find you.

Because here’s the thing: Foreign banks now automatically report American account holders to the IRS. That Swiss bank secrecy everyone talks about? Dead. Gone. Your bank in Germany or Australia or wherever? They’re probably already telling the IRS about you.

Not trying to be dramatic here, but… okay, maybe a little dramatic. This stuff matters.

How Can Expats Reduce Their U.S. Tax Bill? (Legal Strategies That Actually Work)

Finally, the part you’ve been waiting for—how to keep more of your money.

Look, I get it. You’re already paying taxes in whatever country you live in, and now the U.S. wants their cut too? It feels like getting mugged twice. But here’s the thing: With the right moves, most expats can reduce their U.S. tax bill to zero.

Zero. As in nothing. Nada. Zilch.

I’m not talking about tax evasion or shady offshore schemes. This is completely legal stuff the IRS actually WANTS you to use (well, maybe “wants” is strong, but they allow it).

Strategy #1: The Foreign Tax Credit (Your Secret Weapon)

Remember how I said you might be paying taxes twice? The Foreign Tax Credit (FTC) basically says, “Hey, if you already paid Germany/UK/Japan, we’ll give you credit for that.”

And unlike the FEIE, there’s no income limit.

Making $300,000 in London and paying UK taxes? The FTC’s got you covered. It’s dollar-for-dollar credit. Pay $50,000 to the UK? That’s $50,000 off your U.S. tax bill.

When FTC beats FEIE:

• You’re in a high-tax country (most of Europe, Australia, etc.)
• You make over $130,000
• You spend too much time in the U.S. (more than 35 days)
• You want to contribute to retirement accounts

Quick math example: Client in Denmark making $180,000. Danish taxes: $75,000 (yeah, ouch). U.S. tax on that would be about $35,000. But with FTC? He owes zero to the U.S. because he already paid way more to Denmark.

Strategy #2: The Housing Exclusion (The Benefit Everyone Forgets)

On top of the $130,000 FEIE, you can exclude housing costs. And I’m not talking about just rent.

This covers:

• Rent (obviously)
• Utilities (except phone and internet—because reasons)
• Property insurance
• Parking at your residence
• Even some furniture rental

The amount varies by location. Tokyo? You might exclude $40,000+. Rural Thailand? More like $15,000. But still—that’s real money.

Strategy #3: State Tax Divorce (Yes, You Need One)

California doesn’t care that you live in Singapore. New York thinks “once a New Yorker, always a New Yorker.” If you don’t formally break ties with your state, they’ll keep coming after you.

You need to:

• Change your driver’s license
• Update voter registration
• Move your bank accounts
• Get rid of that storage unit

File a final state return saying “I’m outta here”

I’ve seen California chase people for YEARS after they left. One client got a bill for $30,000 in back taxes… while living in Dubai for five years. We fought it and won, but why deal with that headache?

Strategy #4: Timing Is Everything

This one’s subtle but powerful. When you move abroad matters—a lot.

Move in January? Great, you’ve got a full year to qualify for FEIE. Move in July? You might not qualify until the following year. That six-month difference could cost you $40,000 in taxes.

Same with coming back. Visit the U.S. in December instead of January? Just saved yourself a tax year.

The Million Dollar Mistake: Foreign Mutual Funds

Whatever you do, do NOT buy foreign mutual funds. They’re called PFICs (Passive Foreign Investment Companies) and the tax treatment is… I can’t even call it unfair. It’s insane.

You could owe more in taxes than you made in profits. I’m not exaggerating.

Stick to U.S.-based funds or individual foreign stocks. Your future self will thank you.

Can I Stop Paying U.S. Taxes by Renouncing Citizenship? (Spoiler: It’s Complicated)

Oh boy. Here we go.

At least once a month, I get this call: “I’m DONE with U.S. taxes. I’m renouncing. How do I do it?”

And look, I get it. I really do. You’ve been living in Switzerland for 10 years, you’re never moving back, and you’re sick of filing Form 8938 every April. Why not just cut ties completely?

Well… nervous laugh… let me tell you why this might not be the clean break you’re imagining.

First, the Exit Tax (AKA The “Gotcha” Tax)

Think you can just waltz into the embassy, hand over your passport, and skip away tax-free? The IRS has other plans.

If you’re a “covered expatriate” (and most people are), you get hit with an exit tax. Basically, the IRS pretends you sold EVERYTHING you own on the day you renounce. House, stocks, retirement accounts—everything.

Own a house worth $800,000 that you bought for $300,000? Congrats, you just “made” $500,000. Here’s your tax bill.

You’re “covered” if you meet ANY of these:

• Net worth over $2 million (including that house)
• Average tax liability over $190,000 for the past 5 years
• Can’t certify tax compliance for the past 5 years

That last one trips up everyone. Missing one form from 2019? You’re covered. Forgot FBAR three years ago? Covered.

The Compliance Trap

Here’s the real kicker: You need to be completely tax-compliant for the past five years before renouncing. Not “mostly” compliant. Completely.

I had this client—let’s call him Tom. lived in Australia since 2015. Never filed U.S. taxes because “why should I?” Decided to renounce in 2023.

Guess what? He had to file all those back returns FIRST. And pay all the taxes. And penalties. And interest.

His final bill before he could renounce? $67,000.

(He still did it. But man, was he pissed.)

What You’re Actually Giving Up

People focus on the tax stuff, but renouncing means:

• You need a visa to visit the U.S. (even for your mom’s funeral)
• Your kids might not be U.S. citizens
• You can’t just “change your mind” later
• Some countries make it REALLY hard to visit the U.S. after renouncing
• Inheritance gets complicated if you have U.S. family

Plus—and this is the weird one—you might become stateless if you don’t have another citizenship lined up. Don’t laugh, I’ve seen people try it.

The Reed Amendment (The Vindictive Part)

If the government thinks you renounced for tax reasons, they can ban you from the U.S. Forever. Like, permanently persona non grata.

Now, they rarely enforce this. But “rarely” isn’t “never.” You really want to risk never seeing your family again?

When It Actually Makes Sense

Okay, I’m not saying NEVER renounce. For some people, it’s the right call:

• Accidental Americans (born in the U.S., left as babies)
• People with no U.S. ties who’ll never return
• Those facing impossible tax situations with foreign businesses
• Ultra-high net worth folks who’ve done the math

But even then… there’s usually a better way. Tax treaties, proper planning, restructuring—boring stuff that saves you from burning your passport.

The Emotional Cost

Nobody talks about this part, but I’ve seen grown men cry in my office after renouncing. There’s something final about it. One client described it as “breaking up with America.”

And the process itself? Humiliating. You have to go to the embassy, swear an oath that you’re renouncing, explain why, pay $2,350 (yeah, they charge you to leave), and then wait months for it to process.

During which time you’re still filing taxes, by the way.

My Advice?

Try everything else first. Seriously. In 12 years, I’ve had maybe 500 clients threaten to renounce. Know how many actually did it? Six.

The rest? We found legal ways to reduce their tax burden to something manageable. Because despite all the hassle, that blue passport still opens doors. And once it’s gone, it’s gone forever.

(But if you’re really sure? At least talk to someone who knows the exit tax rules. Please. I’m begging you.)

Look, You Don’t Have to Figure This Out Alone (Here’s How We Help)

Alright, we’ve covered a lot. Your head’s probably spinning right now, and honestly? That’s normal.

Expat taxes are complicated. Like, unnecessarily complicated. Between FEIE and FTC and FBAR and FATCA and… deep breath… it’s enough to make anyone want to just ignore it all and hope for the best.

But we both know that’s not a strategy. That’s just delayed panic.

Here’s the thing: I’ve been doing this for 12 years. My team at Dimov Tax? We eat, sleep, and breathe expat taxes (yeah, we’re fun at parties). We’ve helped over 500 Americans living abroad—teachers in Thailand, executives in London, retirees in Costa Rica, digital nomads bouncing around Europe—navigate this exact maze.

And you know what? Once you have someone who knows the rules on your side, it’s not that scary.

What we actually do:

• First, we figure out where you are tax-wise (usually involves me asking a ton of questions and you digging up old bank statements)
• Run the numbers both ways—FEIE vs. FTC—to see which saves you more
• Make sure you’re not missing any forms (because that FBAR penalty is no joke)
• Handle state tax issues (California, I’m looking at you)
• Fix past mistakes without triggering audits (there’s an art to this)
• Keep you compliant year after year (because tax laws change constantly)

But honestly? The best part is just having someone you can call when you’re freaking out about a letter from the IRS or wondering if that new investment account is going to cause problems.

The Bottom Line

Living abroad as an American doesn’t have to mean paying taxes twice. Or living in fear of the IRS. Or spending your weekends trying to figure out Form 2555.

Most of our clients pay ZERO U.S. taxes. Legally. The ones who do pay something? It’s usually way less than they were paying before they found us.

That teacher in Singapore I mentioned? She’s saving $15,000 a year now. The engineer who almost renounced? Kept his citizenship AND cut his tax bill by 80%. These aren’t miracles—it’s just knowing which forms to file and which boxes to check.

Look, I know choosing a tax person is like choosing a dentist. Nobody really wants to do it, but you know you need to. The difference is, a good expat tax specialist can actually save you money instead of just preventing cavities.

So here’s my offer: Let’s chat. No charge, no obligation. Just 30 minutes where you tell me your situation and I tell you straight up what you’re facing. Maybe we work together, maybe you decide to DIY it. Either way, you’ll know where you stand.

Because the one thing worse than dealing with expat taxes? Not dealing with them and hoping they go away.

They won’t.

But with the right help? They become just another annoying adulting task instead of this massive weight on your shoulders. And then you can get back to enjoying whatever amazing country you’ve decided to call home.

Ready to stop stressing about this stuff? Book your free expat tax strategy call here.

Worst case? You waste 30 minutes. Best case? You save thousands and sleep better at night.

Your call.