International Income: U.S. Tax Rules, Exclusions, and Forms

If you’re a US citizen or resident, the United States taxes your income no matter where in the world you earn it, and US tax on foreign income applies whether or not another country has already taxed the same dollars. To keep you from paying twice, federal law offers two main relief tools: the Foreign Earned Income Exclusion, which lets qualifying expats exclude up to $132,900 of foreign wages in 2026,¹ and the Foreign Tax Credit, which reduces your US bill by the income taxes you already paid abroad.² Separately, you have to disclose foreign accounts and assets on a stack of forms whose penalties can exceed $16,000 per account per year even when no tax is owed.

Who Has to Report Foreign Income

Federal law defines gross income as “all income from whatever source derived,” and that reach follows three groups of people wherever they live:³

US citizens. Living in Dallas or Dubai makes no difference, and holding a second passport doesn’t change the obligation.
Green card holders. Lawful permanent residents are taxed the same as citizens for as long as the card is valid, even during long stretches abroad.⁴
Anyone who meets the Substantial Presence Test: physically present in the US at least 31 days in the current year and at least 183 days over a three-year weighted count (all current-year days, one-third of the prior year’s, and one-sixth of days two years back).⁵

Living in a country with no income tax doesn’t excuse you. The filing duty attaches to your status, not to where you work or whether anyone else is taxing you.

What Counts as Foreign-Source Income

The IRS assigns a source to income based on where the underlying activity happens, not where the money lands. Work performed in Germany and deposited into a US bank account is still foreign-source, because the labor took place overseas.⁶ Rent from a house in Mexico is sourced to Mexico. Royalties from a patent used in Japan are sourced to Japan.⁷

Two broad buckets matter for relief. Earned income means wages, salaries, bonuses, professional fees, and self-employment profits from services you personally performed abroad. Passive income covers everything an asset throws off from another country: interest on overseas accounts, dividends from foreign companies, capital gains on foreign real estate or securities, and rental income from properties abroad. Both are reportable, but only earned income qualifies for the main exclusion.

The Foreign Earned Income Exclusion

The biggest relief tool for Americans working abroad is Section 911’s Foreign Earned Income Exclusion.⁸ For 2026 you can exclude up to $132,900 of foreign earned income from your federal return, a threshold adjusted each year for inflation.¹

Your tax home has to be in a foreign country, and you have to pass one of two tests:

Physical Presence Test. You were physically present in a foreign country for at least 330 full days during any 12 consecutive months. Partial days don’t count, and time over international waters generally doesn’t either.⁹
Bona Fide Residence Test. You established genuine residence in a foreign country for an uninterrupted period that includes an entire tax year. Presence alone isn’t enough; the IRS looks for real settlement without immediate plans to return.⁸

The exclusion is limited to earned income. Investment income, pensions, and Social Security benefits don’t qualify. And any dollar you exclude on Form 2555 is off-limits for the Foreign Tax Credit on Form 1116 — you can’t use both reliefs on the same earnings.¹⁰

The Foreign Housing Exclusion

On top of the earned income exclusion, you can exclude or deduct certain housing expenses above a base amount. The base equals 16 percent of the maximum exclusion, prorated for qualifying days in the tax year.¹¹ For 2026, the general cap on eligible housing expenses is $39,870, calculated as 30 percent of the $132,900 exclusion.¹² The IRS publishes higher limits for specific high-cost cities, so rent in London, Tokyo, or Hong Kong may support a substantially larger figure. Both amounts are worked out on Form 2555.¹³

The Foreign Tax Credit

If your income doesn’t qualify for the exclusion, or your earnings run past the $132,900 cap, the Foreign Tax Credit is your primary tool. It reduces your US tax bill dollar-for-dollar by the income tax you already paid to a foreign government.² In countries with tax rates above US levels, the credit often eliminates US tax on foreign income entirely.

The credit has a ceiling. It’s capped at the portion of your US tax that corresponds to your foreign-source taxable income: total US tax multiplied by a fraction whose numerator is foreign taxable income and whose denominator is worldwide taxable income.¹⁴ Excess foreign taxes above that limit carry forward for up to ten years.

You can also take foreign taxes as an itemized deduction rather than a credit. A deduction lowers taxable income instead of tax owed, so it’s almost always less valuable. The credit wins for most filers.¹⁵

Self-Employment Tax and Totalization Agreements

An unpleasant surprise catches many expats: the Foreign Earned Income Exclusion does not reduce self-employment tax. Even if you exclude $132,900 from income tax, you still owe Social Security and Medicare tax on those same earnings.⁹ For employees, the question is whether a foreign social security system is already taking withholding out of the same paycheck.

Totalization agreements exist to keep you from paying into two systems at once. The United States has them with 30 countries, including Canada, the United Kingdom, Germany, Japan, Australia, France, and South Korea.¹⁶ Each agreement assigns your coverage to one country based on where you work and how long. A US worker sent abroad temporarily, generally five years or less, typically keeps paying into the US system and is exempted from the foreign one. You prove that exemption to the foreign government with a Certificate of Coverage from the Social Security Administration.¹⁷

Work in a country without a totalization agreement and you may owe social security taxes to both governments with no relief mechanism. Factor that into any decision about accepting a foreign assignment.

Required Reporting Forms and Thresholds

Foreign compliance runs through a stack of forms beyond the 1040. Missing one can trigger penalties independent of whether you owe tax.

Form 2555 and Form 1116

Form 2555 calculates the Foreign Earned Income Exclusion and the Foreign Housing Exclusion. Form 1116 calculates the Foreign Tax Credit. You can’t apply both to the same income: dollars excluded on 2555 are unavailable for the credit on 1116.¹⁰ Both attach to your regular 1040.

Form 8938 (FATCA)

The Foreign Account Tax Compliance Act requires Form 8938 if your specified foreign financial assets exceed certain totals. Thresholds depend on where you live and how you file:¹⁸

Living in the US, filing single: more than $50,000 on the last day of the year or $75,000 at any point during the year.
Living in the US, filing jointly: more than $100,000 year-end or $150,000 at any point.
Living abroad, filing single: more than $200,000 year-end or $300,000 at any point.
Living abroad, filing jointly: more than $400,000 year-end or $600,000 at any point.

Form 8938 covers more than bank accounts, including foreign securities, interests in foreign entities, and certain financial instruments issued by foreign institutions.¹⁹ It attaches to the 1040.

FinCEN Form 114 (FBAR)

Separately from Form 8938, you file a Report of Foreign Bank and Financial Accounts if the combined value of all your foreign financial accounts exceeds $10,000 at any point during the calendar year.²⁰ The FBAR goes to the Financial Crimes Enforcement Network, not the IRS, and is filed electronically through the BSA E-Filing System. It doesn’t attach to your return.²¹

Many filers need both Form 8938 and the FBAR. The two reports overlap but have different thresholds, different filing destinations, and different penalty structures. Filing one does not satisfy the other.

Form 3520

A gift or inheritance greater than $100,000 from a foreign individual or foreign estate during the year requires Form 3520. Gifts from foreign corporations or partnerships have a lower, inflation-adjusted threshold. No tax is owed on the gift itself, but late filing costs 5 percent of the value per month, up to 25 percent.²²

Form 5471

US shareholders of certain foreign corporations file Form 5471 disclosing ownership and financial activity. The initial penalty for failure to file is $10,000 per form, per year. If the IRS sends a notice and you still haven’t filed 90 days later, another $10,000 accrues every 30 days, up to $50,000 in additional penalties.²³

Converting Foreign Currency

All amounts on your US return are reported in dollars. The IRS wants the exchange rate in effect when you received, paid, or accrued each item of income or expense.²⁴ A monthly salary should be converted at each month’s rate, not a single year-end rate. When multiple rates exist, use the one that best reflects the income. The Treasury Department publishes official reporting rates that federal agencies use, and many preparers treat those as the default reference.²⁵

Filing Deadlines

The standard 1040 deadline is April 15. If you’re living abroad and your main place of business is outside the United States on that date, you automatically get two extra months, pushing the deadline to June 15 without requesting an extension.²⁶ A further extension to October 15 is available, though interest on any tax owed still runs from April 15.

The FBAR runs on its own schedule. It’s due April 15 with an automatic extension to October 15 if you miss the original date, no request required.²⁰

Penalties for Missing a Foreign Filing

International reporting penalties are severe, and they stack. Each form carries its own schedule, and owing no tax doesn’t protect you — these penalties apply to the disclosure failures themselves.

FBAR, non-willful: up to $16,536 per account, per year, inflation-adjusted. Willful violations run up to the greater of $100,000 or 50 percent of the account balance, plus possible criminal prosecution.²⁰
Form 8938: $10,000 for failure to file. Still not filed 90 days after an IRS notice? Another $10,000 every 30 days, up to $50,000 in additional penalties.²⁷
Form 5471: $10,000 per form per year, with the same 90-day-notice escalation up to $50,000 in continuation penalties.²³
Form 3520: 5 percent of the unreported foreign gift per month, up to 25 percent of the total value.²²

Someone with three foreign accounts who misses the FBAR for two years could face nearly $100,000 in penalties even with modest balances and a genuinely unintentional oversight.

Catching Up Through Streamlined Procedures

If you’ve fallen behind but your failure wasn’t willful, the IRS runs streamlined compliance procedures that let you get current without the full penalty exposure. There are two tracks, one for taxpayers living abroad and one for those living in the US.²⁸

Under the foreign offshore track, qualifying taxpayers file three years of amended or delinquent returns and six years of FBARs, with no penalties assessed on the late information returns. The domestic track carries a 5 percent miscellaneous offshore penalty on the highest aggregate balance of undisclosed foreign assets. Both tracks require you to certify that your failures came from negligence, mistake, or good-faith misunderstanding rather than intentional avoidance.

You’re ineligible if the IRS has already opened a civil examination of any year of returns or if you’re under criminal investigation. The procedures are limited to individual taxpayers; businesses and trusts need other avenues. Expats who simply never filed because they didn’t know they had to should look at this seriously before the IRS finds them first.

Tax Treaties

The United States has income tax treaties with dozens of countries, and these agreements can override normal rules in specific situations. A treaty might reduce withholding on cross-border dividends, exempt certain income like pensions or teaching income, or provide a tiebreaker rule for people who qualify as residents of both countries. If you claim a treaty position that changes how income is taxed, you generally disclose it on Form 8833 attached to your return.²⁹

Treaty benefits aren’t automatic. You have to claim them, and the IRS can deny the benefit if you don’t file the disclosure. For expats in countries with comprehensive US treaties like the UK, Canada, or Germany, treaty provisions often matter more than the exclusion for pensions and investment income that the exclusion doesn’t reach.

Two Boundaries Worth Knowing

Federal isn’t the whole picture. Several states continue to tax you as a resident after you move abroad if you keep ties there: a home, a driver’s license, bank accounts, or dependents still living in the state. California and New York are particularly aggressive about residency audits. Severing state tax residency before departure can save a substantial recurring bill.

Renouncing US citizenship or surrendering a green card held for at least eight of the previous fifteen years triggers a separate exit tax regime. Certain “covered expatriates” are treated as having sold all their worldwide assets at fair market value the day before leaving, with tax due on the resulting gain, reported on Form 8854.³⁰ You fall into that category if your net worth exceeds $2 million at expatriation, your average annual net income tax over the prior five years exceeds $211,000 for 2026, or you can’t certify five years of full tax compliance. Deferred compensation, certain retirement distributions, and gifts or bequests to US persons can keep generating tax consequences for years after you’ve given up status, so anyone considering renunciation should plan at least a full tax year ahead.

1
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
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