What Expats Need to Know About US Taxes and Retirement Accounts

The United States is one of only two countries in the world that taxes its citizens on worldwide income regardless of where they live. The other is Eritrea. If you are a US citizen or green card holder living abroad, you must file a US tax return every year, reporting all income from all sources worldwide. This includes salary earned abroad, investment income, rental income, and retirement account distributions.

The good news: the US tax system provides tools to prevent double taxation. The Foreign Earned Income Exclusion (FEIE) allows you to exclude $132,900 of foreign earned income in 2026 (up from $130,000 in 2025) on Form 2555, per the IRS 2026 Form 2555 instructions. The Foreign Tax Credit (FTC) provides a dollar-for-dollar credit for income taxes paid to your host country. The bad news: the rules are complex, the reporting requirements are extensive, and the penalties for non-compliance are severe.

FBAR (FinCEN Form 114) is required if your foreign bank accounts exceed $10,000 in aggregate. The 2026 non-willful penalty is $16,536 per violation. FATCA (Form 8938) is required if your foreign financial assets exceed $200,000 (single expat, year-end). PFIC rules tax foreign mutual funds at 37% plus an interest charge. Roth IRAs are not recognized as tax-exempt in many countries. 401(k) and IRA distributions are taxed as ordinary income by the IRS regardless of where you live. This guide covers the filing requirements, the FEIE, the FTC, FBAR, FATCA, PFIC, retirement accounts, and the Streamlined Filing Compliance Procedures for expats who have not been filing.

Who Must File

US citizens and green card holders

All US citizens and green card holders must file a US tax return if their income exceeds the filing threshold. Filing threshold for single under 65: $14,600 in 2026. Married Filing Jointly: $29,200. Even if all income is foreign-sourced and excluded by the FEIE, you must still file a return to claim the exclusion.

Automatic 2-month extension

If you live outside the US on the due date, you get an automatic 2-month extension to June 15. Interest is charged on tax not paid by the regular April 15 due date.

The Foreign Earned Income Exclusion (FEIE)

What it is

Excludes up to $132,900 of foreign earned income in 2026 (up from $130,000 in 2025). Filed on Form 2555. Only applies to earned income (salary, wages, self-employment). Does not apply to investment income, pensions, or Social Security. If two individuals are married and both work abroad and qualify, each can claim the exclusion, totaling $265,800 for 2026.

Two qualification tests

Physical Presence Test: present in a foreign country for 330 full days during any 12-month period. Bona Fide Residence Test: bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year.

FEIE limitations

Cannot claim the Additional Child Tax Credit if you claim the FEIE. Cannot claim the Earned Income Credit. Cannot claim a Foreign Tax Credit on income excluded by the FEIE. Special rules apply for IRA deduction if you claim the FEIE.

The Foreign Tax Credit (FTC)

What it is

Dollar-for-dollar credit for income taxes paid to a foreign country. Filed on Form 1116. Can be used on income that is not eligible for the FEIE (investment income, pension income, etc.).

FEIE vs FTC strategy

FEIE: best for earned income below the exclusion amount ($132,900 in 2026). Reduces adjusted gross income. FTC: best for earned income above the exclusion amount, or for investment and pension income. Provides dollar-for-dollar credit. You can use both: FEIE on earned income up to the limit, FTC on the remaining income.

FBAR and FATCA Reporting

FBAR (FinCEN Form 114)

Required if aggregate foreign financial account balances exceed $10,000 at any point during the calendar year. Includes checking, savings, investment accounts, and foreign pensions. Filed electronically via FinCEN BSA E-Filing System. Due April 15 with automatic extension to October 15. Non-willful failure to file: up to $16,536 per violation in 2026. Willful failure: up to the greater of $165,353 or 50% of account balance per violation.

FATCA (Form 8938)

Required if foreign financial assets exceed thresholds. Single or Married Filing Separately living abroad: $200,000 on last day of year or $300,000 anytime during year. Married Filing Jointly living abroad: $400,000 on last day or $600,000 anytime during year. Filed with your tax return (not separately like FBAR). Includes foreign pensions, stocks, and mutual funds. Penalty: $10,000 per year of non-filing (up to $50,000 for continued failure).

Example

Robert has $150,000 in a Portuguese bank account. He must file FBAR (exceeds $10,000) but not Form 8938 (under $200,000 single expat year-end threshold).

PFIC Rules: The Expatriate Investment Trap

What is a PFIC

Passive Foreign Investment Company: any mutual fund or ETF not domiciled in the United States. Even low-cost index ETFs listed in Dublin or Luxembourg are PFICs.

The tax treatment

All gains and excess distributions taxed at the highest ordinary income rate (37%), regardless of holding period. No 0%, 15%, or 20% long-term capital gains rates. No step-up in basis. An interest charge is added, calculated as if the gain were earned evenly over the holding period and taxed at the highest rate for each prior year.

Example: a US citizen in Germany buys an Irish-domiciled Vanguard FTSE All World ETF (VWCE). After 10 years, a $100,000 gain triggers PFIC rules. The gain is allocated across 10 years, taxed at 37% each year, plus interest on each year's tax. Total tax could approach 50 to 60% of the gain. The same gain in a US-domiciled fund would be taxed at 15% equals $15,000.

The solution

Hold only US-domiciled funds (Vanguard US ETFs, Fidelity US-domiciled index funds) even while living abroad. Never purchase foreign mutual funds or ETFs. Some brokers (Schwab, Interactive Brokers) allow US expats to hold US-domiciled accounts.

Retirement Accounts for Expats

401(k) and Traditional IRA

Withdrawals taxed as ordinary income by the IRS regardless of where you live. Your host country may also tax these withdrawals. Use the Foreign Tax Credit to offset double taxation. RMDs still apply at age 73.

Roth IRA

Qualified withdrawals remain tax-free for US purposes. Some countries do NOT recognize the tax-exempt nature of Roth IRAs (UK treats them as taxable trusts). Check your host country's tax treaty provisions.

Contributing to retirement accounts while abroad

You need US-earned income to contribute to an IRA. If you claim the FEIE, your excluded income does not count as earned income for IRA contribution purposes. If you have some non-excluded US-earned income (for example, consulting for a US company), you may contribute up to that amount. 2026 IRA contribution limit: $7,500 ($8,600 if age 50+).

Streamlined Filing Compliance Procedures

For expats who have not been filing

The IRS Streamlined Foreign Offshore Procedures allow non-resident US citizens to catch up on unfiled returns without penalties. Requirements: non-willful conduct, lived outside the US for at least 3 of the last 6 years. Must file 3 years of delinquent tax returns and 6 years of delinquent FBARs. No failure-to-file or failure-to-pay penalties. No FBAR penalties.

Why this matters

Many expats do not know they need to file US taxes. The penalties for non-filing are severe (FBAR up to $16,536 per year non-willful, FATCA $10,000 per year). The Streamlined Procedures provide a penalty-free path to compliance. Use an expat tax specialist to navigate the process.

Expat Tax Tools: FEIE vs FTC vs Streamlined Filing

Three Real Expat Tax Scenarios

Example 1: $92,000 salary in Germany with $0 US tax via FEIE

A 35-year-old US citizen works as a software engineer in Germany, earning EUR 85,000 ($92,000). He has a German bank account with EUR 30,000 ($32,500) and a US brokerage account with $150,000 in US-domiciled index funds.

Tax filing: (1) Form 2555: excludes $92,000 of foreign earned income (under the $132,900 limit). US taxable income: $0 from salary. (2) FBAR: required (German bank account exceeds $10,000). (3) Form 8938: not required (German account $32,500 is under $200,000 single expat threshold). (4) Investment income from US brokerage: $3,000 in dividends, taxed at US rates. German tax on dividends: offset by FTC. (5) No PFIC risk: all investments are US-domiciled.

Total US tax owed: approximately $300 (on dividend income after FTC offset).

The lesson: the FEIE eliminates US tax on salary for most expats. FBAR is required but Form 8938 is not for moderate account balances. Keep investments in US-domiciled funds. For US-domiciled investing strategies, read our guide on how to set up automatic investing. For cross-border tax planning, read our guide on how to handle a cross-border tax situation.

Example 2: $72,800 retiree in Portugal using FTC to offset double taxation

A 62-year-old US citizen retires in Portugal. Income: Social Security $2,400 per month ($28,800 per year), 401(k) withdrawals $3,000 per month ($36,000 per year), investment income $8,000 per year. Total income: $72,800 per year.

Tax filing: (1) FEIE: does not apply (retirement income is not earned income). (2) Social Security: up to 85% taxable by US ($24,480). Portugal may also tax Social Security depending on treaty. (3) 401(k) withdrawals: taxed as ordinary income by US ($36,000). Portugal may also tax. (4) FTC: dollar-for-dollar credit for Portuguese taxes paid on the same income. (5) FBAR: required (Portuguese bank accounts exceed $10,000). (6) Form 8938: required if Portuguese accounts exceed $200,000 year-end. (7) RMDs: still apply at 73.

Total US tax after FTC: approximately $3,000 to $5,000 (depending on Portuguese tax rate and treaty provisions).

The lesson: retirees abroad cannot use the FEIE. The FTC is the primary tool for avoiding double taxation. Social Security and 401(k) withdrawals are taxable by the US. The host country may also tax them. The FTC offsets the double taxation. For estate planning, read our guide on how to handle finances after the death of a spouse. For inheritance management, read our guide on how to handle an inheritance without blowing it.

Example 3: 10-year non-filer in Japan catching up via Streamlined Filing with $0 penalties

A 45-year-old US citizen has lived in Japan for 10 years and never filed US taxes. She earns JPY 8,000,000 ($54,000) and has JPY 5,000,000 ($34,000) in a Japanese bank account. She also bought a Japanese mutual fund (a PFIC) worth $20,000.

Streamlined Filing: (1) She qualifies for Streamlined Foreign Offshore Procedures (non-willful, lived outside US for 10 years). (2) Files 3 years of delinquent tax returns: FEIE excludes all salary ($54,000 is under $132,900). US tax owed: $0 for each year. (3) Files 6 years of delinquent FBARs: Japanese bank account exceeds $10,000 each year. No FBAR penalties under Streamlined. (4) PFIC: the Japanese mutual fund is a PFIC. She should sell it and reinvest in US-domiciled funds. The PFIC tax on any gains will be significant (37% plus interest), but the Streamlined Procedures waive failure-to-file penalties. (5) Going forward: file annually, use FEIE, file FBAR, hold only US-domiciled investments.

The lesson: the Streamlined Procedures provide a penalty-free path to compliance. But PFIC holdings should be addressed immediately. Sell foreign mutual funds and buy US-domiciled ETFs. For values-based planning, read our guide on how to set financial goals that align with what you actually care about.

Common Mistakes

Not filing US taxes at all. US citizens must file regardless of where they live. The FEIE must be claimed on a filed return. Not filing means not claiming the exclusion, and the IRS can assess tax on your full income.

Buying foreign mutual funds or ETFs. PFIC rules tax gains at 37% plus an interest charge. Hold only US-domiciled funds. This is the most expensive mistake expats make.

Not filing FBAR. Required if foreign accounts exceed $10,000 aggregate. Non-willful penalty: $16,536 per year in 2026. Willful: greater of $165,353 or 50% of balance.

Not filing FATCA Form 8938. Required if foreign assets exceed $200,000 (single expat). Penalty: $10,000 per year.

Assuming the FEIE covers all income. It only covers earned income. Investment income, pensions, and Social Security are not excluded. Use the FTC for those.

Not checking tax treaty provisions. Your host country may tax US retirement income, Roth IRA distributions, or Social Security differently. Tax treaties determine which country has primary taxing rights.

Contributing to a Roth IRA with FEIE-excluded income. FEIE-excluded income does not count as earned income for IRA contributions. You need non-excluded US-earned income.

Not using the Streamlined Filing Procedures. If you have not been filing, the Streamlined Procedures offer a penalty-free path to compliance. Do not wait. The longer you delay, the more expensive it gets.

Filing late without the extension. Expat automatic extension is to June 15. But interest accrues on unpaid tax from April 15. Pay by April 15 if you owe tax.

Not using an expat tax specialist. Expat taxes are complex. A specialist costs $300 to $700 but can save thousands in penalties and optimize your FEIE and FTC strategy.

File Every Year, Hold US Funds, File FBAR

US citizens and green card holders must file US taxes on worldwide income regardless of where they live. The FEIE excludes up to $132,900 of foreign earned income in 2026 on Form 2555. The FTC provides a dollar-for-dollar credit for foreign taxes paid. FBAR required for foreign accounts over $10,000 aggregate. FATCA Form 8938 required for foreign assets over $200,000 (single expat). PFIC rules tax foreign mutual funds at 37% plus interest. Hold only US-domiciled funds. 401(k) and IRA withdrawals taxed as ordinary income by the US. Roth IRA qualified withdrawals are US tax-free but may be taxed by your host country. RMDs still apply at 73. You need non-excluded US-earned income to contribute to an IRA. The Streamlined Foreign Offshore Procedures provide a penalty-free path for non-filers: 3 years of tax returns, 6 years of FBARs, no penalties for non-willful non-residents. Use an expat tax specialist. The cost is far less than the penalties.

The three most important things for US expats are: (1) File every year. Even if your income is fully excluded by the FEIE, you must file a return to claim the exclusion. Not filing means the IRS can assess tax on your full income without the exclusion. (2) Never buy foreign mutual funds or ETFs. PFIC rules are explicitly punitive. A $100,000 gain in a foreign fund can be taxed at 50 to 60%. The same gain in a US-domiciled fund is taxed at 15%. Hold only US-domiciled investments. This single rule can save you hundreds of thousands of dollars over your investing lifetime. (3) File FBAR if your foreign accounts exceed $10,000. The penalty for non-filing is $16,536 per year (non-willful) or the greater of $165,353 or 50% of your account balance (willful). FBAR takes 15 minutes to file electronically. There is no reason not to do it. If you have not been filing, use the Streamlined Foreign Offshore Procedures. Three years of returns, six years of FBARs, no penalties. It is the best deal the IRS offers. Take it before they change the rules.

Do three things this year. File your US tax return. If you live abroad, you get an automatic extension to June 15. Claim the FEIE on Form 2555 to exclude up to $132,900 of foreign earned income. File FBAR if your foreign bank accounts exceed $10,000 in aggregate. File electronically at the FinCEN BSA E-Filing System. It takes 15 minutes. The penalty for not filing is $16,536 per year. Check your investment accounts. If you hold any foreign mutual funds or ETFs, sell them and buy US-domiciled funds. PFIC rules tax foreign funds at 37% plus interest. US-domiciled funds are taxed at 15% long-term capital gains. Then read our guide on how to handle a cross-border tax situation for more on international tax planning.

This post is for informational purposes only and does not constitute tax advice. US tax rules for expats are complex and subject to change. Consult a qualified expat tax specialist before making decisions about filing, foreign accounts, or retirement planning.