Yes, foreign income is taxable in the US. If you are a U.S. citizen, a lawful permanent resident, or a non-citizen who meets the Substantial Presence Test, the IRS taxes your worldwide income — wages, investment returns, rental income, pensions, and anything else you earn — no matter where you live or where the money was paid. Two main relief provisions soften the impact: the foreign earned income exclusion, worth up to $132,900 per person for 2026, and the foreign tax credit, which offsets U.S. tax dollar for dollar based on income taxes you have already paid abroad. Both require you to file, and neither applies automatically.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
Who Has to Report Worldwide Income
Three groups owe U.S. tax on income from every source, foreign and domestic: U.S. citizens (including those who have lived abroad for years or decades), Green Card holders, and non-citizens who meet the Substantial Presence Test.2Internal Revenue Service. U.S. Citizens and Resident Aliens Abroad
The Substantial Presence Test looks at physical presence over three years. You meet it if you were in the United States at least 31 days during the current year and your weighted day count over the current year and the two preceding years totals 183 or more. Each day in the current year counts as one, each day in the first preceding year as one-third, and each day in the second preceding year as one-sixth.3Office of the Law Revision Counsel. 26 U.S.C. 7701 – Definitions Some days are excluded — for example, days spent in the country as a foreign government diplomat, a teacher or trainee on a J or Q visa, or a student on an F, J, M, or Q visa.4eCFR. 26 CFR 301.7701(b)-3
The obligation to file exists even when you expect to owe nothing after applying exclusions and credits. Filing is how the IRS confirms your disclosure. Skipping the return because the math zeroes out can trigger penalties on its own.
What Kinds of Foreign Income Are Taxed
The IRS divides foreign income into two broad categories, and the distinction matters because only one qualifies for the earned income exclusion.5Internal Revenue Service. Foreign Earned Income Exclusion – What Is Foreign Earned Income
Earned income is pay for personal services performed in a foreign country: wages, salaries, commissions, bonuses, professional fees, and tips.
Unearned or investment income is everything else: interest from foreign bank accounts, dividends from international stocks, rental income from overseas property, royalties, capital gains, gambling winnings, pensions, annuities, and social security-type benefits paid by foreign governments. This income doesn’t qualify for the foreign earned income exclusion, though the foreign tax credit may still apply.
All foreign-currency amounts have to be converted to U.S. dollars on your return, generally at the exchange rate in effect the day the income was received or the expense was paid.6Internal Revenue Service. Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad
Self-Employment Income
If you work for yourself abroad, your net earnings are subject to regular income tax and self-employment tax, which funds Social Security and Medicare. The foreign earned income exclusion shelters income from income tax only. It does not touch self-employment tax. Say your foreign earned income is $95,000 and business deductions come to $27,000: you owe self-employment tax on the full $68,000 net, even if the exclusion wipes out your income tax on that amount.7Internal Revenue Service. Publication 54
Foreign Pensions
Distributions from foreign pension plans and retirement annuities are taxed under the same rules as U.S. pensions: taxable amount equals gross distribution minus your after-tax contributions. You won’t receive a 1099, but the income is still reportable. A tax treaty with the country where you live may give that country exclusive rights to tax the pension, which can reduce or eliminate the U.S. tax on it.8Internal Revenue Service. The Taxation of Foreign Pension and Annuity Distributions
The Foreign Earned Income Exclusion
The foreign earned income exclusion lets you leave a slice of foreign earnings out of U.S. taxable income. For 2026, the maximum is $132,900 per person. Anything above that gets taxed at regular federal rates.1Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
To claim it, your tax home has to be in a foreign country and you have to pass one of two tests:9Office of the Law Revision Counsel. 26 U.S.C. 911
- Bona Fide Residence Test. You are a U.S. citizen who has been a genuine resident of a foreign country for an uninterrupted period covering a full tax year (January 1 through December 31 for calendar-year filers).
- Physical Presence Test. You are a U.S. citizen or resident who was physically present in a foreign country for at least 330 full days during any 12 consecutive months.
You claim the exclusion on Form 2555, which asks for every entry and exit date for international travel. Keep detailed records. Lease agreements, utility bills, and foreign employer records help back up your qualifying days if the IRS pushes back.
The exclusion applies only to earned income. It doesn’t shelter investment income, rental income, or pension distributions.
Foreign Housing Exclusion or Deduction
You may also be able to exclude or deduct part of your foreign housing costs. If your employer covers housing (or pays you a salary you use for housing), you claim the foreign housing exclusion. If you’re self-employed, you take the foreign housing deduction. Qualifying costs include rent, utilities, insurance, and certain occupancy taxes. They do not include mortgage payments, purchased furniture, or lavish expenses. The excludable amount is the excess of your actual housing costs over a base figure tied to the exclusion limit, capped at a ceiling that the IRS sets higher for specific high-cost cities.9Office of the Law Revision Counsel. 26 U.S.C. 911
The Foreign Tax Credit
The foreign tax credit is the other main defense against double taxation. Rather than removing income from the calculation, it reduces your U.S. tax dollar for dollar by the amount of income tax you’ve paid to a foreign government. You claim it on Form 1116.10Office of the Law Revision Counsel. 26 U.S.C. 901
To qualify, the foreign tax must be:
- A legally imposed income tax (or a tax in lieu of an income tax) that you were required to pay. Sales taxes, value-added taxes, and property taxes do not qualify.
- Actually paid or accrued. Refunded taxes and taxes used as a subsidy do not count.
- Paid to a foreign country or a U.S. possession.
You need documentation — official receipts or assessment notices from the foreign authority — and every amount has to be converted to U.S. dollars at the exchange rate on the date the tax was paid or accrued. The credit is capped at the portion of your U.S. tax that corresponds to your foreign-source income; it can’t be used against tax on domestic earnings.
Exclusion or Credit — Which One
You can use both in the same year, but not on the same income. If you exclude wages under the FEIE, you can’t also credit the foreign taxes paid on those wages. Taxpayers in high-tax countries often get more mileage from the credit because it directly wipes out U.S. tax. Taxpayers in low-tax countries usually do better with the exclusion, which removes a fixed slice of income from the calculation regardless of what tax the other country charged.
Unused Credits Carry Over
If your foreign tax credit is larger than the year’s limitation allows you to use, the extra doesn’t vanish. You can carry it back one year and forward for up to ten, applying it against U.S. tax in those years.11eCFR. 26 CFR 1.904-2
Tax Treaties and Totalization Agreements
The United States has income tax treaties with dozens of countries. A treaty can lower withholding rates on dividends, interest, or royalties, exempt specific categories of income, or give the country where you reside sole taxing rights over pensions or other items. Where a treaty conflicts with a section of the Internal Revenue Code, the treaty controls for that income.12Office of the Law Revision Counsel. 26 U.S.C. 894 – Income Affected by Treaty
Totalization agreements are separate. The U.S. has these Social Security agreements with 30 countries — the United Kingdom, Canada, Germany, Japan, France, Australia, and South Korea among them — and they keep you from paying Social Security taxes to both systems on the same earnings.13Social Security Administration. U.S. International Social Security Agreements
Reporting Foreign Bank Accounts and Financial Assets
Holding money outside the U.S. sets off reporting duties that are separate from your tax return and carry heavy penalties on their own.
FBAR
If the combined value of your foreign financial accounts topped $10,000 at any moment during the year, you have to file a Report of Foreign Bank and Financial Accounts (FinCEN Form 114). This covers bank accounts, brokerage accounts, mutual funds, and certain other financial accounts held outside the United States. The FBAR is filed electronically through FinCEN’s BSA E-Filing System, not with your return.14Financial Crimes Enforcement Network. Report Foreign Bank and Financial Accounts
The threshold is aggregate. Three accounts each holding $4,000 push you over the $12,000 combined mark and trigger the filing. The deadline is April 15, with an automatic extension to October 15 if you miss it.
Penalties are steep. A non-willful violation can bring a civil penalty with a $10,000 statutory base, adjusted annually for inflation. A willful violation can reach the greater of $100,000 or 50 percent of the account balance, plus possible criminal charges.15Internal Revenue Service. Comparison of Form 8938 and FBAR Requirements
FATCA Reporting (Form 8938)
Form 8938 is a separate disclosure of specified foreign financial assets. The category is broader than the FBAR’s and reaches foreign stocks, bonds, partnership interests, pension accounts, and other financial instruments held outside the U.S. You file Form 8938 with your regular tax return.16Internal Revenue Service. Summary of FATCA Reporting for U.S. Taxpayers
Thresholds depend on filing status and where you live:17Internal Revenue Service. Do I Need to File Form 8938
- Unmarried, living in the U.S.: total exceeds $50,000 on the last day of the year or $75,000 at any point in the year.
- Married filing jointly, living in the U.S.: total exceeds $100,000 on the last day of the year or $150,000 at any point in the year.
- Living abroad (single or married filing separately): total exceeds $200,000 on the last day of the year or $300,000 at any point in the year.
- Married filing jointly, living abroad: total exceeds $400,000 on the last day of the year or $600,000 at any point in the year.
Form 8938 does not replace the FBAR. If you cross both thresholds, you file both.
Foreign Gifts, Inheritances, and Other Information Returns
Gifts and inheritances from foreign individuals are generally not taxable income to a U.S. recipient, but they are reportable once they cross certain sizes. Aggregate gifts over $100,000 in a year from a nonresident alien individual or a foreign estate must be reported on Form 3520. Gifts from foreign corporations or foreign partnerships have a much lower threshold — roughly $20,000, adjusted annually for inflation — and each individual gift over $5,000 has to be identified.18Internal Revenue Service. Large Gifts or Bequests From Foreign Persons
Missing Form 3520 costs the greater of $10,000 or 35 percent of the gross reportable amount, with an additional $10,000 penalty for each 30-day period the form stays unfiled after an IRS notice, up to the full reportable amount.19Internal Revenue Service. Failure to File Form 3520/3520-A Penalties
Similar $10,000-per-form penalties apply to Form 5471 (interests in foreign corporations), Form 8865 (foreign partnerships), and Form 3520-A (foreign trusts), with continuation penalties for each 30-day period past an IRS notice. The IRS assesses these automatically for late or missing forms, even when no additional tax is owed.20Internal Revenue Service. International Information Reporting Penalties
Deadlines If You Live Abroad
The standard filing deadline is April 15. U.S. citizens and resident aliens living abroad with a main place of business outside the United States get an automatic two-month extension to June 15. You don’t have to ask for it, but you do have to attach a statement to your return explaining that you qualify.21Internal Revenue Service. Automatic 2-Month Extension for U.S. Citizens Abroad
Watch the catch. The two-month extension applies to filing, not payment. Interest on tax owed starts running from April 15 even though the return isn’t due until June 15.22Internal Revenue Service. U.S. Taxpayers Living Abroad Must File and Pay Taxes by June 16
Need more time? File Form 4868 to push the deadline to October 15. The FBAR runs on its own calendar: due April 15, automatic extension to October 15, filed through FinCEN.
Catching Up If You’ve Fallen Behind
If you failed to report foreign income or accounts and the failure was not intentional, the Streamlined Filing Compliance Procedures let you come into compliance with reduced or waived penalties. The program is open to individuals living abroad and to those in the United States who can certify that the noncompliance was due to negligence, inadvertence, mistake, or a good-faith misunderstanding of the law.23Internal Revenue Service. Streamlined Filing Compliance Procedures
You can’t use the procedures if the IRS has already opened a civil examination of any of your returns or if you’re under criminal investigation. Qualifying taxpayers submit amended returns (typically three years of income tax returns and six years of FBARs) plus a certification of non-willful conduct. Taxpayers living abroad who meet the non-residency requirement have all penalties waived. Domestic filers face a 5 percent miscellaneous offshore penalty.
State Tax on Foreign Income
Federal rules aren’t the end of the story. If you keep ties to a U.S. state — a home, driver’s license, or voter registration — that state may tax your foreign income too. Some states have no income tax, some tax worldwide income and refuse to recognize the federal foreign earned income exclusion, and rules vary widely in between. Before you move abroad, check whether your state still treats you as a resident. An incomplete break can leave you owing state income tax on foreign earnings the federal rules would let you exclude.