Common US Expat Tax Issues & Questions—Advice & Answers Provided

The United States is one of the few countries that taxes based on citizenship rather than residence, which means you must report and potentially pay tax on your worldwide income, no matter where you live.

Failure to understand and fulfil your filing requirements can result in penalties, interest charges, and increased audit risk.

In this guide, we’ll explore common expat tax issues for US citizens – from reporting foreign income and assets to navigating tax credits and exclusions. You will also find answers to frequently asked questions to help you stay compliant while optimising your global tax position.

Why Does the US Tax Expats?

One of the main expat tax issues for many US citizens is confusion regarding the payment of US taxes on worldwide income while living in another country. The main reason for this law is that US tax obligations depend on citizenship rather than residence.

You can avoid this requirement if you renounce your US citizenship—a costly choice that rarely pays off.

What Taxes Must US Expats Pay?

As a US citizen living outside of America, you must file a federal tax return. Generally, you must pay worldwide:

Depending on the state you lived in before moving abroad, you may still be considered a tax resident and required to file a state tax return.

Some states – such as California, New York, and Virginia – have strict rules that can treat you as a resident for tax purposes even after living abroad for several years, especially if you maintain ties such as property ownership, voter registration, or a driver’s licence.

While many states may consider you a non-resident if you are physically absent for more than half the year, the rules vary significantly.

Given the complexity of state tax residency, it is highly recommended to seek advice from a tax professional familiar with multi-state and international residency issues.

Like all US citizens, you must file the 1040 form to report your income to the IRS.

To simplify tax filing and planning while living abroad, you can utilise tax planning services at Titan Wealth International. Our tax experts will ensure you’re fulfilling all your tax obligations on time.

What Expat Tax Issues Do Americans Face When Filing Taxes From Abroad?

While US expats still have to pay US taxes, you may be able to eliminate or reduce tax liability in certain scenarios. To do so, you must file your taxes properly, which many Americans struggle with due to complex tax laws in the US. Here are the main errors US expats make when filing taxes from abroad:

1. Reporting only net income
2. Reporting foreign rental property taxes incorrectly
3. Failing to report foreign accounts and assets

Reporting Only Net Income

If you’re eligible for a foreign tax credit, you should report the full amount of foreign income you earn along with the foreign tax credit amount. Many Americans report only the net income by subtracting the foreign tax credit amount from the whole foreign income sum, which leads to double taxation.

To avoid this common issue, report the gross income amount and the tax credit separately. For example, if you earned $3,000 and your foreign income credit is $600, report both of these amounts separately instead of reporting $2,400.

Reporting Foreign Rental Property Taxes Incorrectly

When it comes to foreign rental property, US expats come across two tax problems:

1. The net effective income is below the threshold the foreign country has for reporting rental income, so they don’t report it on the US tax return.
2. They lose money on property, so they don’t include it on the US tax return.

This can cause issues with the IRS since foreign rental property taxation is usually treated the same as in the US. If either scenario applies to you, you have to include foreign rental property on your foreign income tax return.

Failing To Report Foreign Accounts and Assets

As a US expat, you are required to report foreign financial accounts and assets to the US government.

You must file an FBAR (Foreign Bank Account Report) if the aggregate value of all foreign financial accounts exceeds $10,000 USD at any point during the calendar year. This applies even if each account is below the threshold individually.

You must also file Form 8938 (Statement of Specified Foreign Financial Assets) under the Foreign Account Tax Compliance Act (FATCA) if your total foreign financial assets exceed:

1. $200,000 at year-end (single filer abroad), or
2. $400,000 at year-end (married filing jointly abroad).

Penalties for non-compliance can be severe:

• FBAR: Up to $10,000 per non-willful violation; up to 50% of the account balance for willful violations.
• Form 8938: A $10,000 minimum fine, increasing if the failure continues after IRS notification.

Given the complexity of international reporting requirements, it is highly recommended to consult an expat tax specialist to ensure compliance and avoid penalties.

Frequently Asked Questions About Expat Tax—Answered

US expats often face issues regarding specific questions related to their tax-paying obligations. The most frequent expat tax questions are related to:

• Expat tax percentage
• Late tax returns
• Tax exemptions
• Filing inbound tax returns

What Is the Percent of Tax an Expat Must Pay as a US Citizen?

As a US citizen, you are taxed on your worldwide income, regardless of where you live. This means you are subject to the same federal income tax brackets as residents of the United States.

For the 2025 tax year (returns due by April 2026), marginal tax rates range from 10% to 37%, depending on your filing status and taxable income.

*These brackets are indexed annually for inflation.

What Happens if You File a Late Tax Return?

If you don’t file a US tax return as an expat or are late with filing your taxes, you may incur penalties, passport denial, and even criminal charges. If you knowingly avoided your US tax obligations while living abroad, there may be even more serious legal consequences.

The penalty for failing to file taxes is 5% of the unpaid taxes for each month you were late with your tax return, and this amount is capped at 25% of your unpaid taxes. If you’re over 60 days late, the minimum Failure to File penalty is typically 100% of the underpayment or $485, whichever is less.

The Failure to Pay penalty is 0.5% of the taxes you haven’t paid each month, up to 25%.

If both Failure to File and Failure to Pay are applicable in the same month, the former is redacted by the amount of the latter. The combined penalty becomes 5% for each month (or part of the month) you were late.

Is There a Tax Exemption for US Expats Living Abroad?

Yes, the IRS provides several tax benefits to help you reduce tax liability while living abroad. Some of the tax exemptions you may be liable for include:

Do I Have To File an Inbound Expatriate Tax Return as a US Expat?

Some countries – such as Spain, Italy, and Portugal – offer favourable tax regimes for inbound expatriates. These programmes allow qualifying expats to be treated as non-residents for local tax purposes, often for up to six years, even after establishing legal residency.

For example, under Spain’s inbound expatriate regime, qualifying individuals who move to Spain may be taxed only on Spanish-source income at a flat rate, rather than on their worldwide income, for the year of arrival and the following five tax years.

These are local country tax incentives, not US tax exemptions.

As a US citizen, you are still required to file US tax returns and report your worldwide income under US tax law, regardless of local tax benefits abroad.

These foreign regimes can reduce your local tax burden, which may in turn lower your total global tax liability – especially when used in conjunction with US provisions like the Foreign Tax Credit or FEIE.