Updated Tax Information for Americans Residing Abroad in 2025
In the complex world of international taxation, US expats often find themselves facing a daunting array of tax obligations. This guide aims to provide a clear and concise overview of the key factors to consider.
One strategy to reduce tax obligations is the foreign-earned income exclusion, which allows US citizens to legally exempt a certain amount of foreign income from taxation. For 2025, the exclusion amount is set at $130,000 per person.
However, US expats may still face a range of taxes, including rental income, local taxes, state taxes, and foreign income taxes. In some cases, they may even be subject to double taxation, paying taxes both in the United States and in their country of residence.
To avoid paying US expat taxes, some individuals may consider renouncing their US citizenship. While this can be an option, it comes with an exit tax and other complications. An alternative approach is to transfer property and investments to a non-US spouse to avoid paying expat taxes.
For those seeking to reduce their tax burden further, Nomad Capitalist offers strategies to bring tax obligations down from more than 40% to as low as 1%. The company helps wealthy investors and entrepreneurs to move their investments overseas, gain a second citizenship, or move to a tax-friendly country.
It's important to note that the US tax system requires citizens to pay taxes no matter where they live. The physical presence test measures an expat's time spent outside the United States and determines their expat status. Tampering with this test can lead to charges.
The US has adopted measures to help citizens avoid double taxation, including tax treaties with over 70 countries. The bona fide residence test measures how well an expat has integrated into their new country. Being away from the United States for a certain period does not automatically make an individual an expat in the eyes of the IRS.
Work trips back to the US could potentially affect an expat's status as an expat or their ability to pass the physical presence test or the bona fide residence test, making them eligible for the foreign-earned income exclusion.
It's crucial for US expats to ensure their tax affairs are in order to make tax season less problematic. All US citizens and Green Card holders living abroad are required to pay US expat taxes, and they must file a US federal tax return, regardless of where they live.
In addition to the taxes mentioned above, US expats have to report any income made by overseas property if renting it out, selling it, or passing it on to family members. Some countries charge no income tax at all, while others, like Malta, do not tax foreign-earned income if it's not remitted to the island.
The cost of taxes for US expats can add up significantly, leading many to seek ways to legally reduce their tax obligations. The US government argues that citizens have a tax obligation because their citizenship is a privilege and the government is responsible for their success in life. The government also claims that citizens pay taxes to cover the costs of various 'free' utilities and services offered due to their citizenship.
As the world becomes increasingly interconnected, the complexities of international taxation will continue to evolve. By understanding the key factors and strategies, US expats can navigate this complex landscape more effectively and ensure they are meeting their tax obligations while minimising their financial burden.
