How to Avoid Double Taxation as a US Expat

Double taxation remains a thorn in the side of US expats around the world, and for good reason. The United States remains one of only two countries in the world that taxes worldwide income on a citizenship basis and not on a residency basis, like the majority of the world does. What does that mean? As a US citizen or Green Card holder, you must report and pay tax on your worldwide income, regardless of where you call home.

This long-standing policy gained renewed attention after Donald Trump stated he would eliminate US taxes on expatriates if re-elected. While no changes have been made, the comment underscores how relevant and contentious this issue is for Americans worldwide.

Fortunately, it’s not all doom and gloom. The IRS has provisions and tax treaties to help alleviate and often completely eliminate double taxation for US expats. In this guide, we break down double taxation, how it works, and the strategies you can use to reduce or avoid it altogether.

What Is Double Taxation?

Double taxation occurs when two different countries tax the same income. For US expats, it usually means paying income tax to both your host country and to the United States on the same earnings.

While most countries tax individuals based on where they live, the United States follows a citizenship-based taxation system. That means you must file a US federal tax return on Form 1040 and report your worldwide income, regardless of where you live. That includes salary, self-employment income, interest, dividends, and even certain foreign pensions.

This applies not only to intentional expats but also to Accidental Americans. These are individuals who unknowingly acquired US citizenship through a US parent or by being born in the US, and may not realize they have US tax obligations.

Is Double Taxation Legal?

Yes. Under current law, the US government is entirely within its rights to tax citizens on their worldwide income. While most countries tax only residents, the US operates on the principle that citizenship creates a permanent tax responsibility, regardless of location.

Although entirely legal under US law, citizenship-based taxation remains deeply controversial. Critics argue it unfairly burdens Americans living abroad, especially those who receive no services in return. Nonetheless, the government has upheld the legal framework and it remains in full effect.

That said, the IRS provides mechanisms to help avoid actually paying tax twice on the same income.

IRS Tools to Avoid Double Taxation

To help avoid actual double taxation, the IRS offers several key provisions. These allow US expats to either reduce or completely offset their US tax liability:

Foreign Tax Credit (FTC) – Form 1116

This is the most widely used tool for US expats paying taxes abroad. The Foreign Tax Credit provides a dollar-for-dollar credit against your US tax bill for foreign income taxes paid. It is handy in a high-tax country like Germany or France.

To claim the FTC, you:

• Must file Form 1116 with your tax return
• Can only use the credit for US tax owed on the same income that was taxed abroad
• Can only use the credit for the same type of income (e.g., general or passive)
• May carry forward unused credits for up to 10 years, or back to the prior year

Foreign Earned Income Exclusion (FEIE) – Form 2555

Instead of taking a credit, the Foreign Earned Income Exclusion allows you to exclude up to $126,500 (2024) of foreign earned income from US taxation. You must meet either:

• The Physical Presence Test (330 days abroad in a 12-month period)
• Or the Bona Fide Residence Test (based on permanent residency in a foreign country)

You cannot use both the FEIE and FTC for the same income. However, you can combine them in certain cases. For example, you might use FEIE for income up to the exclusion limit, and apply the FTC to any income above that amount or to passive income not covered by FEIE.
Speak to trusted tax professionals like those at MyExpatTaxes to determine the best strategy for your situation.

Foreign Housing Exclusion (FHE)

If you qualify for the Foreign Earned Income Exclusion (FEIE) and file Form 2555, you may also be able to exclude certain foreign housing costs, like rent, utilities, and insurance, from your US taxable income. The Foreign Housing Exclusion is especially valuable if you live in a high-cost city abroad. The amount you can exclude depends on how expensive your location is, based on limits set by the IRS.

Self-employed expats claim this benefit as a deduction, rather than an exclusion; however, the net effect is the same.

Tax Treaties – Form 8833

The US has income tax treaties with over 60 countries. See the full list on IRS.gov. These agreements define which country has the primary right to tax certain types of income, such as pensions, royalties, or Social Security.

You may need to file Form 8833 to claim a treaty benefit, identifying the article and provision you’re relying on. Treaties vary, so it’s important to verify details country by country. Also, be aware that as a US citizen or Green Card holder, you can only use benefits specifically exempt from the infamous Savings Clause. The Savings Clause allows the US to continue taxing its citizens as if the treaty didn’t exist, unless the treaty specifically says you’re exempt from tax on a certain type of income.

Totalization Treaties

Separate from tax treaties, these bilateral agreements coordinate Social Security tax obligations between the US and certain countries. You pay into only one system at a time, and in many cases, a totalization treaty allows you to combine work credits from both countries to qualify for benefits. To use a totalization treaty, you typically need a certificate of coverage from the country whose system applies. This confirms your exemption from paying into both systems.

Additional Reporting Requirements: FBAR and FATCA

US expats must also report their foreign financial accounts to stay compliant. If the total value of your foreign accounts exceeds certain thresholds, you may need to file:

• FBAR (Foreign Bank Account Report – FinCEN Form 114): Required if your combined foreign account balances exceed $10,000 at any point during the year.
• FATCA (Foreign Account Tax Compliance Act – Form 8938):** Applies if your foreign financial assets exceed specific thresholds based on your filing status and residency.

These informational forms do not typically result in tax owed, but failing to file them can lead to steep penalties.

How Double Taxation Shows Up in Practice

Double taxation doesn’t always look the same. The way it affects you depends on how and where you earn income. Here are some common scenarios with

Salaried Employees Abroad

If you work for a local employer in your host country, you’ll typically owe tax there first. However, you must also report that income on your US tax return as a US citizen.

The Foreign Earned Income Exclusion (Form 2555) may be your best option to exclude up to $126,500 of foreign earned income in 2024, especially if you live in a no-tax country like the UAE, where there’s no foreign tax to claim as a credit.

The Foreign Tax Credit (Form 1116) is often the better choice if you live in a high-tax country, like the UK. It directly reduces your US tax bill based on the foreign taxes you’ve already paid, often wiping out your US liability entirely. If you have credits left over, you can use the FTC carryover for future tax years (up to 10) or offset foreign taxes going back one year.

FTC vs FEIE

Here’s a side-by-side comparison of the Foreign Tax Credit (FTC) and the Foreign Earned Income Exclusion (FEIE) to help you understand which may be more beneficial for your situation:

Feature	Foreign Tax Credit (FTC)	Foreign Earned Income Exclusion (FEIE)
Form	Form 1116	Form 2555
Reduces tax by	Dollar-for-dollar credit	Excludes income from US taxation
Best for	High-tax countries (e.g. UK, Germany)	Low/no-tax countries (e.g. UAE, Singapore
Income types covered	Almost all types of income, as long as foreign income taxes were paid on (salary, dividends, interest, rental, etc)	Earned income only, wages
Foreign tax required?	✅ Yes, you must have paid foreign income tax to claim the credit	❌ No — you can exclude income even if your host country doesn’t tax it
Carryover options	✅ Yes, 10 years forward, 1 year back	❌ No

Passive Income from Investments

If you receive income from dividends, interest, or rental properties abroad, you’ll owe US tax, even if it’s also taxed in your host country.

The Foreign Tax Credit (Form 1116) is the best option in this case, since the FEIE does not apply to passive income like the FTC does.

Freelancers and Self-Employed US Expats

If you work for yourself overseas, you may owe both income and self-employment taxes to the US, even if you’re already taxed abroad.

The Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC) can both reduce your US income tax liability, but neither exempts you from the 15.3% US self-employment tax (Social Security and Medicare). Even if you’re contributing to a foreign system, self-employment tax still applies unless your country has a Totalization Agreement with the US.

Foreign Corporations with US Shareholders

If you own or invest in a foreign company that’s treated as a C-corporation for US tax purposes—meaning it has limited liability, the income may be taxed twice.

US persons that collectively own more than 50% of a foreign corporation, the IRS classifies it as a Controlled Foreign Corporation (CFC). If the company is a CFC and you personally own at least 10%, you may be required to report the company’s net profit, even if it’s not distributed, under the Global Intangible Low-Taxed Income (GILTI) rules or as Subpart F income.

You must also file Form 5471 to report your ownership and the company’s financial details, even if no US tax is ultimately due.

While corporate foreign tax credits may help offset this tax, you cannot use the Foreign Earned Income Exclusion or your personal foreign tax credits to reduce GILTI or Subpart F income.

If you later distribute funds to yourself as salary or dividends, that income is also taxable by the IRS. Depending on the income type, standard expat tax benefits like the Foreign Earned Income Exclusion or Foreign Tax Credit will apply.

Let MyExpatTaxes help you evaluate strategies like the Section 962 election to reduce your GILTI exposure and ensure full compliance with Form 5471 reporting.

Be Cautious of PFICs

Investing in a foreign mutual fund, ETF, or other passive investment vehicle may be classified as a Passive Foreign Investment Company (PFIC) under US tax law. PFICs come with complex reporting requirements and may trigger significantly higher US taxes on gains and distributions if not handled correctly.

State Tax Obligations for US Expats

Even if you’re living abroad, some US states may still expect you to file a state tax return, especially if they consider you a resident for tax purposes.

Some states may continue to tax your worldwide income, regardless of where you live. So-called “sticky states” like New York, California, New Mexico, Virginia, and South Carolina aggressively hold onto residency status unless you take clear steps to cut ties or show that you truly moved out of the state and do not intend to return This typically means giving up your state driver’s license, registering to vote elsewhere, selling or renting out your home, and severing other financial or legal connections.

By contrast, states like Florida, Texas, Nevada, and Washington have no state income tax. If you established residency in one of these states before moving abroad, you generally won’t have any state filing obligations.

Maximize Relief, Stay Compliant

If you, like many Americans, weren’t aware of your US tax obligations, all is not lost. The IRS Streamlined Filing Procedures allow many expats to catch up penalty-free, provided their failure to file was non-willful and resulted from a genuine misunderstanding or unawareness of the requirements.

Double taxation can feel overwhelming, but there are tools to avoid it that are already built into the US tax system. By staying informed, planning ahead, and using the right tax strategy for your circumstances, most US expats can significantly reduce or even eliminate their US tax liability on foreign income.

Need help understanding your options? MyExpatTaxes makes it easy to file your US tax return from abroad, ensuring you stay compliant and take full advantage of the expat tax benefits available to you.

Frequently Asked Questions (FAQ)

Do I have to pay US taxes if I already pay tax abroad?

Not necessarily. If your foreign taxes are equal to or greater than your US liability, you may eliminate your US tax bill entirely using the Foreign Tax Credit (Form 1116). But you still need to file.

How can I avoid paying taxes twice as a US expat?

Use the Foreign Tax Credit to offset U.S. taxes with foreign taxes paid. If you live in a country with low or no taxes, the Foreign Earned Income Exclusion may be a better option. You can also explore treaty benefits and totalization agreements, depending on your situation.

What if I didn’t know I had to file US taxes?

If your failure to file was non-willful—due to a genuine misunderstanding or lack of knowledge—the IRS Streamlined Filing Procedures allow you to catch up without penalties.

Can I use both the FEIE and FTC?

Yes, but not on the same income. You can use the Foreign Earned Income Exclusion for up to $126,500 of earned income, and the Foreign Tax Credit on income above that or on passive income.

Do US states tax foreign income?

Some do. California, New Mexico, Virginia, and South Carolina may still consider you a resident unless you sever ties and formally move out of the state without an intention to return. States like Florida and Texas don’t have an income tax at all.

What is a Totalization Agreement?

It’s an agreement between the US and certain countries to avoid double Social Security taxation. It assigns coverage to one system and may exempt you from the US self-employment tax if you pay into a foreign one.

What if I earn dividends or rental income abroad?

The FEIE doesn’t apply, but the Foreign Tax Credit may offset your US tax on that income.

Is double taxation legal?

Yes. Under US law, the government can tax citizens on their worldwide income, even if they live abroad. While this is unusual globally, US tax law is based on citizenship, not residency.