The United States taxes its citizens and resident aliens on worldwide income, wherever they live. Because the country where they live may also tax that income, Americans abroad can face tax in two countries. This article explains the rule, its legal basis, and the main provisions that reduce double taxation.
Who Is Taxed on Worldwide Income
According to the IRS, U.S. citizens and resident aliens are subject to tax on worldwide income from all sources, and the rules for filing returns and paying estimated tax are generally the same whether they are in the United States or abroad. Resident aliens include lawful permanent residents (green card holders), who are U.S. residents for federal tax purposes for any calendar year in which they hold that status at any time.
A return is generally required for any year in which worldwide gross income is at least the filing threshold for the taxpayer’s filing status, the same threshold that applies to taxpayers living in the United States.
For example, a U.S. citizen who earns $200,000 working in Singapore and $50,000 from a U.S. client reports all $250,000 on the U.S. return. Relief provisions may reduce the U.S. tax on the foreign income, but they must be claimed on a filed return.
The Legal Basis
The Supreme Court upheld this approach in Cook v. Tait, 265 U.S. 47 (1924). The taxpayer, a U.S. citizen domiciled in Mexico, challenged U.S. tax on income from property located in Mexico. The Court held that the tax was valid, reasoning that the power to tax does not depend on where the property is located or where the citizen lives, but on the citizen’s relationship to the United States.
Information reporting supports the system. Under the Foreign Account Tax Compliance Act (FATCA), foreign financial institutions report on foreign assets held by their U.S. account holders or are subject to withholding on certain payments. U.S. taxpayers may also have to report foreign accounts and assets on the FBAR and Form 8938.
What Income Is Covered
Worldwide income includes foreign wages, self-employment and business income, rents, interest, dividends, capital gains, and other income, all reported in U.S. dollars. Only some of these items are eligible for the foreign earned income exclusion.
Foreign Earned Income Exclusion
A U.S. citizen with a tax home in a foreign country who meets the bona fide residence test or the physical presence test (at least 330 full days in a foreign country during any 12-month period) may elect to exclude foreign earned income on Form 2555, up to $130,000 for 2025 and $132,900 for 2026. Certain U.S. resident aliens can also qualify. Qualifying individuals may also be able to exclude or deduct certain foreign housing amounts.
The exclusion applies only to foreign earned income, meaning pay for personal services such as wages, salaries, and professional fees. It does not reduce self-employment tax, and the tax on any remaining income is figured at the rates that would have applied without the exclusion.
Foreign Tax Credit
A taxpayer who pays foreign income taxes on income that is also subject to U.S. tax can generally take either a credit or an itemized deduction for those taxes, and the choice applies to all qualified foreign taxes for the year. According to the IRS, the credit is usually the better choice. It is claimed on Form 1116 and can reduce only U.S. tax on foreign-source income. In most cases, only foreign income taxes qualify; foreign property taxes do not. Excess foreign taxes may be carried back or forward to other years, subject to limits.
The exclusion and the credit can be used together, but not for the same income: no credit or deduction is allowed for foreign taxes on income excluded under the foreign earned income or housing exclusions.
For example, an American abroad with $100,000 of foreign wages and $50,000 of foreign dividends and interest may be able to exclude the wages. The $50,000 of investment income remains subject to U.S. tax, at the rates that would apply if the wages had not been excluded, although a foreign tax credit may be available for foreign income tax paid on it.
A Note for California Residents
State rules can differ. For California residents filing Form 540, the 2025 instructions for Schedule CA (540) direct taxpayers to add back the amount of the federal foreign earned income and housing exclusion, so those amounts are not excluded for California purposes.
The Bottom Line
U.S. citizens and resident aliens report worldwide income wherever they live. The foreign earned income exclusion, the foreign housing exclusion or deduction, and the foreign tax credit can reduce double taxation, but each must be claimed on a filed U.S. return, and foreign account reporting requirements apply separately.
Questions About U.S. Tax on Foreign Income?
Tax attorney Cassra Minai, Esq. can review your U.S. filing obligations on foreign income in a confidential consultation.