Living abroad doesn’t exempt you from U.S. taxes—and without the right strategy, you could end up paying twice. For millions of Americans working internationally, navigating expat taxes has become more complex than ever in 2025. New thresholds, increasing IRS scrutiny, and more aggressive foreign account reporting requirements mean that doing nothing is no longer an option.

Fortunately, there are powerful tools available to reduce or eliminate your U.S. tax bill—even if you’re earning a full salary overseas. The key is understanding what income qualifies, how to use the Foreign Earned Income Exclusion (FEIE) or Foreign Tax Credit (FTC) effectively, and how to structure your filing to stay fully compliant.

In this guide, we’ll walk you through how to avoid double taxation in 2025, what’s changed this year, and how to take full advantage of the rules. And if you’re looking for expert help to make the process easier, we’ll show you how Harness can help you file smarter—no matter where you live.

Table of Contents

  1. Why expat taxes are so complicated in 2025
  2. What counts as foreign-earned income?
  3. How the Foreign Earned Income Exclusion (FEIE) works in 2025
  4. How the Foreign Tax Credit helps avoid double taxation
  5. The role of tax treaties and totalization agreements
  6. How Harness helps expats file smarter

Why expat taxes are so complicated in 2025

U.S. expats face a uniquely challenging tax landscape in 2025. You’re still required to file a U.S. tax return—and possibly pay U.S. tax—even if you’ve lived abroad for years and already pay taxes to another country. Without a smart strategy, double taxation can quickly become your reality.

Here’s why filing is more complex (and more important) than ever.

Global income is still fully reportable

Unlike most countries, the U.S. uses a citizenship-based taxation system, meaning Americans abroad must report their worldwide income. That includes your salary, self-employment income, rental earnings, and investment gains—even if it’s all earned and taxed overseas. The IRS is explicit: if you’re a U.S. citizen or resident alien, you must file.

IRS enforcement is ramping up

Over the past two years, the IRS has stepped up enforcement of foreign account reporting requirements under FBAR (FinCEN Form 114) and FATCA (Form 8938). If your total foreign financial accounts exceeded $10,000 at any point in the year, you’re likely required to file. Failure to comply—even unintentionally—can trigger penalties of $10,000 or more.

2025 thresholds have changed

Tax year 2025 brings several key updates:

These inflation-adjusted figures change the math for many expats—especially those combining the FEIE with other deductions or credits.

Expats face higher audit risk

While general audit rates remain low, expats are more likely to be flagged due to complex filings, foreign assets, or misreported income. Having a foreign employer, claiming housing exclusions, or filing Forms 2555 and 1116 without proper documentation increases scrutiny.

What counts as foreign-earned income?

Before you can reduce your tax bill as an expat, you need to understand what actually qualifies as foreign-earned income under IRS rules. The distinction matters—because only certain types of income are eligible for exclusions or credits like the FEIE.

The IRS definition

According to IRS guidance on foreign income, foreign-earned income is income you receive for services performed in a foreign country during a period when your “tax home” is also in a foreign country.

This includes:

Importantly, it must be earned income—meaning income tied to active work. Passive income such as dividends, capital gains, rental profits, or pension payments does not qualify for the FEIE.

Your tax home matters

To claim exclusions like the FEIE, your “tax home” must be in a foreign country. This generally means your main place of business or employment. Extended travel or temporary assignments don’t qualify—even if you’re gone for several months.

Timing also matters

A calculator and pen resting on financial paperwork—representing the calculations expats must make to determine Foreign Earned Income Exclusion eligibility and avoid double taxation.

To qualify for the FEIE in 2025, income must be earned during the calendar year and while you meet one of the two IRS residency tests (covered in the next section). Income earned outside of that qualifying period—even from the same job—typically won’t be eligible.

How the Foreign Earned Income Exclusion (FEIE) works in 2025

For many Americans living abroad, the Foreign Earned Income Exclusion (FEIE) is the single most effective way to avoid double taxation. It allows you to exclude up to a specific dollar amount of foreign-earned income from your U.S. tax return—provided you meet all the criteria.

The 2025 FEIE limit

For tax year 2025 (filed in 2026), the IRS has increased the exclusion limit to $130,000 per qualifying individual. That means a married couple filing jointly could potentially exclude up to $260,000 if both spouses qualify independently.

This is an increase from $126,500 in 2024, and it reflects the IRS’s annual inflation adjustment.

Who qualifies?

To claim the FEIE, you must:

Let’s break those down.

Physical Presence Test

You must be physically present in one or more foreign countries for at least 330 full days during any 12-month period that overlaps with the tax year. Travel days don’t count. It’s about actual, physical presence—boots-on-the-ground time abroad.

Bona Fide Residence Test

This is based more on your intentions and circumstances than just your time abroad. You must:

Both tests require careful documentation. Small errors—like miscounted travel days—can lead to denied exclusions or IRS scrutiny.

What FEIE doesn’t cover

The FEIE only applies to earned income. It does not exclude:

How the Foreign Tax Credit helps avoid double taxation

The Foreign Tax Credit (FTC) is another important tool for managing expat taxes, particularly when the FEIE doesn’t cover all your income—or when you have passive income like dividends or capital gains that aren’t eligible for exclusion.

What is the Foreign Tax Credit?

The FTC allows you to claim a dollar-for-dollar credit on your U.S. tax return for income taxes you’ve already paid to a foreign government. In other words, if you’ve already paid tax on your income abroad, the IRS won’t make you pay that same tax again—up to certain limits.

This applies to:

You can claim the credit by filing Form 1116 with your U.S. tax return. If your foreign taxes are relatively simple and under $300 ($600 for joint filers), you may be able to use the simplified method without the form.

When to use the FTC instead of the FEIE

Some expats qualify for both the FEIE and the FTC. But depending on your income type and amount, one may be more advantageous than the other.

You may want to use the FTC if:

You can’t double-dip—you can’t claim the FTC on income you’ve already excluded using the FEIE. But you can combine the two methods by using the FEIE on earned income and the FTC on passive income.

Why it matters in 2025

A person completing paperwork at a table—illustrating the documentation required to claim the Foreign Tax Credit and ensure IRS compliance for expats in 2025.

With many high-tax countries increasing their income tax rates and the IRS expanding foreign asset scrutiny, using the FTC effectively can make a significant difference in your total tax liability. And if you’re living in a country with a tax treaty with the U.S., your credit eligibility may be even more favorable.

The role of tax treaties and totalization agreements

Even with the FEIE and Foreign Tax Credit in place, many expats still face uncertainty—especially when it comes to retirement contributions, Social Security taxes, or dual filing obligations. That’s where U.S. tax treaties and totalization agreements can offer additional clarity and protection.

What are tax treaties?

The U.S. has income tax treaties with over 60 countries that clarify how various types of income—like wages, retirement distributions, or investment gains—should be taxed between jurisdictions. These treaties help prevent double taxation and can provide:

Each treaty is different, and the benefits can be highly technical. For example, under the U.S.–U.K. tax treaty, certain U.K.-based pensions may be taxed only in the U.K., not the U.S., under Article 17. But in other countries, U.S. taxation might still apply. That’s why understanding the exact terms of your host country’s treaty is essential.

What are totalization agreements?

If you’re working abroad, there’s a good chance you and your employer are paying into a foreign Social Security system. Totalization agreements—separate from tax treaties—help you avoid paying double Social Security taxes by determining which country’s system you contribute to.

As of 2025, the U.S. has signed totalization agreements with more than 30 countries, including Canada, the U.K., Germany, Australia, and Japan. If you’re in one of these countries, the agreement typically:

Why this matters now

With remote work and cross-border employment still on the rise, many Americans are triggering tax residency rules in multiple countries. Treaties and totalization agreements offer a legal framework for resolving conflicts—but they require proper application. Many of the benefits aren’t automatic—you may need to file Form 8833 to disclose treaty positions, or provide a certificate of coverage to claim Social Security exemptions.

How Harness helps expats file smarter

Living abroad doesn’t mean you leave your U.S. tax obligations behind. But with the right strategy—and the right advisor—you can stay compliant and avoid paying more than you owe.

In 2025, understanding expat taxes requires more than just knowing which forms to file. It’s about understanding how the Foreign Earned Income Exclusion, Foreign Tax Credit, and treaty benefits all interact. The stakes are high, especially with increased IRS scrutiny and evolving international tax standards. But so are the opportunities—if you know how to plan.

At Harness, we make it easier. Our experienced tax professionals specialize in complex international filings and work directly with you to build a personalized tax strategy, no matter where in the world you’re working.

Avoid double taxation—and gain peace of mind. Get started with Harness and work with a vetted expert who understands your expat needs.

Disclaimer: 

Tax related products and services provided through Harness Tax LLC. Harness Tax LLC is affiliated with Harness Wealth Advisers LLC, collectively referred to as “Harness Wealth”. Harness Wealth Advisers LLC is a paid promoter, internet registered investment adviser. Registration does not imply a certain level of skill or training. This article should not be considered tax or legal advice and is provided for informational purposes only. Please consult a tax and/or legal professional for advice specific to your individual circumstances. This article is a product of Harness Tax LLC.


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