Why the US taxes citizens abroad – And what it costs Americans overseas

The United States is one of only two countries in the world – the other being Eritrea – that taxes people based on citizenship, not where they live. This means that if you hold a US passport or green card, the IRS expects you to report your worldwide income every year, no matter where you live or work.

If you’ve fallen behind on filing, the IRS streamlined domestic offshore procedures offer a way to get back on track with reduced penalties – more on that below.

An estimated 9 million Americans currently live overseas. Most of them still have to file US taxes every single year.

A tax system unlike any other

This policy is called citizenship-based taxation (CBT). Its roots go back to a 1924 Supreme Court case – Cook v. Tait – which ruled that US government protections follow citizens abroad, so a tax obligation follows too.

Every other developed country uses residency-based taxation: you pay taxes where you live. Under the US model, you can live in Germany, pay German taxes in full, and still owe a US tax return every April.

For millions of us taxpayers living abroad, this creates a compliance burden that exists nowhere else in the world.

Do US citizens living abroad have to pay taxes?

Yes – and there’s no exception just for living overseas. You must file a US federal tax return if your worldwide income exceeds these thresholds for the 2025 tax year:

The $5 threshold for married-filing-separately is one of the most overlooked rules in expat tax law. If your spouse is not a US citizen and you file separately, nearly any income triggers a filing requirement.

Despite these rules, only about 1.1 million returns are filed from foreign addresses each year. Most of the 9 million Americans abroad simply don’t know they need to file.

Will you actually owe anything?

Probably not. Around 62% of Americans who file from abroad owe zero US tax after using available relief options. There are three main tools that help prevent double taxation:

• Foreign Earned Income Exclusion (FEIE): Lets you exclude up to $130,000 in foreign wages for 2025 (rising to $132,900 in 2026). Couples where both qualify can exclude up to $260,000 combined.
• Foreign Tax Credit (FTC): Gives you a dollar-for-dollar credit for taxes already paid to a foreign government. Americans abroad claim nearly $29.5 billion in these credits every year.
• Tax Treaties: The US has treaties with over 60 countries that decide which country gets to tax what – pensions, dividends, capital gains, and more.

The catch? These tools only work if you actually file. Filing is required even when your final US tax bill is $0.

The hidden reporting requirements

Paying US taxes abroad is one thing. But there are also reporting rules for foreign bank accounts that many expats don’t know about – and the penalties for missing them are steep.

FBAR (FinCEN Form 114)

If the combined balance of all your foreign bank accounts exceeds $10,000 at any point during the year, you must file an FBAR. This applies to the total across all accounts – not each one individually. Three accounts with $4,000 each still requires filing. Penalties for non-willful violations start at $16,536 per year.

FATCA (Form 8938)

Under FATCA, you must report foreign financial assets over $200,000 at year-end (or $300,000 at any point during the year). Missing this filing costs a minimum of $10,000 – up to $50,000 if the IRS sends a formal notice and you still don’t file.

Both requirements apply even when you owe zero US tax. This surprises a lot of American citizens working abroad.

The real costs nobody talks about

The financial cost of living overseas as a US taxpayer isn’t always about the tax bill itself. It’s the time, the professional fees, and the stress of dealing with a system built for people who never left home.

“Accidental Americans” – people born in the US but raised entirely abroad – face this problem in the hardest way. Fewer than 15% of this group currently meets their US tax obligations, often because they didn’t know they had any.

For those who fall behind, the consequences can include:

• Loss of the Foreign Earned Income Exclusion
• Stacking FBAR and FATCA penalties year after year
• Passport revocation for unpaid tax debt over $62,000
• Five years of back compliance required before you can renounce citizenship

In 2024 alone, over 4,800 Americans formally gave up their citizenship – with the complexity of paying US taxes while living abroad cited as a major reason.

Behind on filing? Here’s what to do

If you’ve missed years of returns because you didn’t know you had to file, you’re not alone – and the IRS has a program specifically for this situation. The IRS streamlined domestic offshore procedures let eligible US-based taxpayers catch up by filing 3 years of back returns and 6 years of FBARs, with only a 5% penalty instead of the full enforcement rates.

If you live outside the US, the Streamlined Foreign Offshore Procedures offer the same path – with no penalty at all for qualifying filers.

Both programs are open as of March 2026, but the IRS can shut them down at any time without warning. The longer you wait, the fewer options you have.

Will the US ever change this system?

There’s a growing push – from both parties – to replace CBT with residency-based taxation, like the rest of the world uses. Supporters say the current system puts American workers at a disadvantage globally and hits middle-class expats the hardest, since they can’t afford the professional help that wealthier Americans use to navigate it.

The taxation of US citizens living abroad has become more than a tax debate. It’s a question about what American citizenship actually means in a world where millions of Americans build their lives outside US borders.

Until the law changes, the rule stays the same: US taxes abroad follow the passport, not the address.