US citizens owe US tax on worldwide income wherever they live, so living abroad changes how you file, not whether you file. The two main tools against double tax are the Foreign Earned Income Exclusion (up to $132,900 per person for tax year 2026) and the Foreign Tax Credit. Which one works better depends mostly on how much tax you pay where you live.
Last checked: September 2026
In short:
- US citizens owe US tax on worldwide income wherever they live, so living abroad changes how they file, not whether they file.
- The Foreign Earned Income Exclusion (Form 2555) removes up to $132,900 of foreign earned income per qualifying person for tax year 2026, but it doesn’t reduce self-employment tax.
- The Foreign Tax Credit (Form 1116) has no fixed dollar cap and can apply to earned and unearned income, so it can beat the FEIE in high-tax countries or above the cap.
Citizenship-based taxation in one paragraph
The IRS says US citizens and resident aliens abroad are “subject to tax on worldwide income from all sources.” Moving to a zero-tax country, a territorial country or no country at all doesn’t change that. What you can do is shrink the US bill with the exclusion, the credit, or both, used on different income. If your tax year is the calendar year, living abroad gives you an automatic extension of the filing deadline from April 15 to June 15. Interest still runs on any tax unpaid after April 15.
Option 1: Foreign Earned Income Exclusion (FEIE, Form 2555)
What it does: removes foreign earned income (wages, self-employment income) from US income tax, up to a cap.
Cap: $130,000 for 2025 and $132,900 for 2026, per qualifying person. If both spouses work abroad and qualify, each can claim it.
To qualify, you need both:
- A tax home in a foreign country. Your main place of work has to be abroad, not a temporary assignment.
- One of these tests:
- Bona fide residence test: a resident of a foreign country for an uninterrupted period that includes a full tax year.
- Physical presence test: physically present in a foreign country or countries for at least 330 full days in any 12 consecutive months. The days have to be full days abroad, so travel days need checking. Nomads who move around a lot usually rely on this test and need to count carefully.
Housing exclusion or deduction: you can also exclude (if employed) or deduct (if self-employed) qualifying foreign housing costs above a base amount. The base is 16% of the maximum exclusion, prorated by day. For 2026 that works out to $21,264 for a full year. There’s also a cap on housing costs. In the 2025 instructions it was $39,000 for most places (30% of that year’s exclusion), with higher limits for listed high-cost cities. Check the 2026 Form 2555 instructions for this year’s location limits.
What it doesn’t do:
- It doesn’t cover unearned income such as dividends, interest, capital gains or rent.
- It doesn’t reduce self-employment tax. The IRS is explicit: the excluded amount reduces regular income tax, not self-employment tax.
- You can’t claim a foreign tax credit on income you’ve excluded.
Option 2: Foreign Tax Credit (FTC, Form 1116)
What it does: gives you a dollar-for-dollar credit for qualifying foreign income taxes against your US tax on the same income. It can apply to earned and unearned income, and it has no fixed dollar cap. It’s limited to the US tax on your foreign income, and excess credits can be carried to other years.
The IRS notes that in most cases it’s better to take foreign taxes as a credit than as an itemised deduction.
Why the FTC can beat the FEIE
- High-tax countries. If you pay more foreign tax than the US would charge, the credit can wipe out US tax on that income and leave extra credits for other years. The exclusion stops at the cap and leaves anything above it exposed.
- Income above the cap. A founder paying themselves $300,000 excludes $132,900 at most. The FTC can cover the whole amount if enough foreign tax was paid.
- Unearned income. The FEIE never covers dividends or gains. The FTC can, if foreign tax was paid on them.
- Knock-on effects. Excluding income changes your taxable income, and that can affect other parts of your return, such as credits and retirement contributions. Get your preparer to model both methods rather than assuming.
The FEIE usually wins when you live somewhere with low or no income tax and your earned income is at or below the cap. Examples are the Gulf, the Caribbean, or a territorial country where your foreign earnings aren’t taxed locally.
Be careful about switching. The FEIE is an election, and changing your approach from year to year can have consequences, so don’t flip between methods without advice.
Self-employment tax and totalization
If you’re self-employed, you generally still owe US self-employment tax even with the FEIE. The way out, if there is one, is a totalization agreement. The US has 31, the newest being Romania (2026). Others include the UK, Canada, Australia, Japan, South Korea, Chile, Brazil, Uruguay and most of Western Europe. Some agreements assign self-employed people to the social security system of their country of residence, which can remove the US charge. The Gulf, most of the Caribbean, and much of Southeast Asia and Latin America have no agreement.
Reporting: FBAR and FATCA
These are separate from income tax, and the penalties for missing them are serious.
| Form | Who files | Threshold |
|---|---|---|
| FBAR (FinCEN 114) | US persons with foreign financial accounts | Aggregate value above $10,000 at any time in the year. Due April 15, automatic extension to October 15 |
| Form 8938 (FATCA), living abroad | Single or married filing separately | More than $200,000 on the last day of the year or $300,000 at any time |
| Form 8938, living abroad | Married filing jointly | More than $400,000 on the last day or $600,000 at any time |
The FBAR and Form 8938 overlap but don’t replace each other. Many people have to file both.
State tax: don’t forget where you came from
Some US states can keep treating you as a resident after you leave if you haven’t clearly broken domicile there. Things that can keep the connection alive include a home you’ve kept, a driver’s licence, voter registration or a business base. Before leaving, find out what your state needs to see, cut the ties you can, and keep proof of when you left.
Related: Tax residency explained: why the 183-day rule is a myth for most countries · Tax-free countries (2026): no income tax countries you can actually live in · Territorial tax countries compared: where foreign income isn’t taxed · Exit tax explained: which countries charge it when you leave · US expat taxes (2026): filing, FEIE, FBAR and catching up · How to leave the US (2026): a checklist for moving out of the US
Quick answers
Q: What is the foreign earned income exclusion limit for 2026?
The Foreign Earned Income Exclusion cap is $132,900 per qualifying person for 2026, up from $130,000 for 2025. If both spouses work abroad and qualify, each can claim it. It covers only earned income such as wages and self-employment income, not dividends, interest, capital gains or rent, and it doesn’t reduce self-employment tax.
Q: Should I use the FEIE or the Foreign Tax Credit?
The FEIE usually wins if you live somewhere with low or no income tax and your earned income is at or below the cap. The Foreign Tax Credit can beat it in high-tax countries, on income above the cap, and on unearned income where foreign tax was paid. Get your preparer to model both methods.
Q: How many days abroad do I need for the FEIE physical presence test?
You need to be physically present in a foreign country or countries for at least 330 full days in any 12 consecutive months, and you also need a tax home in a foreign country. The days have to be full days abroad, so travel days need checking. Nomads who move around a lot usually rely on this test.
Sources
- IRS: Foreign earned income exclusion
- IRS: Figuring the foreign earned income exclusion
- IRS: Foreign housing exclusion or deduction
- IRS: Instructions for Form 2555
- IRS: Foreign tax credit
- IRS: Publication 514
- IRS: U.S. citizens and resident aliens abroad
- IRS: FBAR
- IRS: Comparison of Form 8938 and FBAR requirements
- SSA: International agreements overview
This is general information from the Nomad Forums team, not tax or legal advice. Rules change; check with a qualified adviser before acting.
Over to you: Americans abroad, which method do you use and what made you choose it? If you’re self-employed in a country without a totalization agreement, how are you handling self-employment tax?