Overseas Work Income is Also Subject to U.S. Taxation

Some entrepreneurs are U.S. citizens or green card holders but spend most of their time working overseas, paying local income taxes and residing abroad long-term—sometimes even working for foreign companies. Do they still need to file U.S. taxes?

U.S. tax law requires all American taxpayers to report their worldwide income, regardless of where they live or work. As long as you are a citizen or permanent resident, you are considered a U.S. taxpayer and must file with the IRS, even if you reside, work, or operate a business abroad.

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Tax Benefit: Foreign Earned Income Exclusion (FEIE)

Many misunderstand this provision, assuming all overseas income automatically qualifies for exemption. In reality, the FEIE applies only to those who meet specific criteria:

  • 2024 exemption amount: $126,500 per person
  • Eligibility requires passing one of two tests:
    1. Bona Fide Residence Test: Evaluates long-term residency intent and ties to the foreign country.
    2. Physical Presence Test: Requires staying outside the U.S. for at least 330 full days within a 12-month period.

⚠️ Important Note:
Qualifying for the FEIE does not exempt you from filing. You must still submit Form 1040 and attach Form 2555 to claim the exclusion. Expats receive an automatic 2-month extension (deadline: June 15), with the option to request further extension to October 15.

Social Security Tax Rules for Overseas Workers

  • Working for a foreign company: Exempt from U.S. Social Security tax (and cannot pay voluntarily).
  • Working for a U.S. company or subsidiary: Subject to mandatory withholding.
map of the world book laid open on brown wooden surface

Foreign Account Reporting (FBAR & FATCA)

U.S. citizens and green card holders with foreign financial accounts must comply:

  • FATCA (Form 8938): Requires reporting specified foreign financial assets if the total exceeds certain thresholds, which vary depending on filing status and residency. For example, in 2025:
    • Single taxpayers living in the U.S.: over $75,000 at year-end or $110,000 at any time during the year.
    • Taxpayers living abroad: higher thresholds (e.g., $200,000 at year-end).
  • FBAR (FinCEN Form 114): Required if aggregate foreign account balances exceed $10,000 at any time during the calendar year.
    • Includes bank accounts, brokerage accounts, mutual funds, and other financial assets.
    • Deadline: April 15 with automatic extension to October 15 (note change from prior June 30 deadline).
    • Filed separately with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), not the IRS.

Penalties for Non-Compliance:

  • Willful violations: Fines up to $130,000 or 50% of account balances, plus potential criminal charges (up to 5 years imprisonment).
  • Non-willful violations: Fines up to $14,250 per violation (adjusted for inflation in 2023).

Key Takeaways

  1. Penalties for unreported foreign assets are severe—proactive compliance is critical.
  2. All global income must be reported to the IRS.
  3. The FEIE reduces taxable income but does not eliminate filing requirements.
  4. FBAR reporting applies even if accounts generate no taxable income.
  5. Be aware of deadlines and documentation requirements to avoid penalties.

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