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International Tax Guide for 2026
International tax preparation covers the Foreign Earned Income Exclusion (FEIE), the Foreign Tax Credit (FTC), FBAR foreign account reporting, FATCA Form 8938, expatriate tax filing, dual status alien returns, and ITIN applications. This guide explains the rules for US citizens working abroad, green card holders with foreign income, nonresident aliens with US income, and US persons with foreign accounts.
Do US citizens have to file taxes when living abroad?
Yes. The US taxes its citizens and green card holders on worldwide income regardless of where they live. Even if you have not lived in the US for years, you still file Form 1040 each year (unless income is below filing thresholds). Failure to file does not relieve liability and starts no statute of limitations.
Several mechanisms reduce double taxation: the Foreign Earned Income Exclusion, the Foreign Tax Credit, the foreign housing exclusion, and tax treaties between the US and many countries.
If you have not filed in years and are otherwise low risk (no willful evasion), the Streamlined Foreign Offshore Procedures provide a relatively gentle path back into compliance. Three years of returns and six years of FBARs, with no penalty if you certify non willful conduct.
How does the Foreign Earned Income Exclusion (FEIE) work?
FEIE excludes foreign earned income up to a limit (130,000 dollars in 2026 estimate) from US income tax. Eligible only if you meet either the Bona Fide Residence Test (resident of a foreign country for an entire tax year) or the Physical Presence Test (330 full days in a foreign country during any consecutive 12 month period). Reported on Form 2555.
FEIE applies only to earned income (wages, self employment), not investment income, pension distributions, or rental income. Self employment income above the FEIE limit is also subject to self employment tax (Social Security, Medicare) regardless of FEIE.
The foreign housing exclusion (employees) or deduction (self employed) covers reasonable housing expenses above a base amount, on top of the FEIE. The amount varies by city; high cost cities like Hong Kong or London get higher allowances.
How does the Foreign Tax Credit (FTC) work?
FTC is a credit against US tax for foreign income taxes paid on the same income. Reported on Form 1116. Election available between credit (usually superior, dollar for dollar reduction) and itemized deduction (only reduces taxable income).
FTC is limited to the US tax that would otherwise be due on the foreign source income. Excess foreign tax can be carried back one year or forward 10 years.
FTC works well in countries with tax rates higher than US (e.g., UK, Germany, Australia). FEIE works better in countries with lower tax rates than US (e.g., UAE, Singapore, Hong Kong on certain income). Some taxpayers use both: FEIE for excludable earnings up to limit, FTC for foreign tax on income above the limit.
What is FBAR and who must file it?
FBAR is FinCEN Form 114, the Foreign Bank Account Report. Required if the aggregate maximum value of all foreign financial accounts (bank, brokerage, mutual fund, foreign retirement) exceeded 10,000 dollars at any time during the year. Each account counts toward the threshold even if individually small.
Filed separately from the tax return through the BSA E-Filing System at fincen.gov. Due April 15 with automatic extension to October 15 (no application needed).
Penalties for non willful failure: up to 10,000 per year per account (capped per Bittner v. United States 2023 at one penalty per FBAR not per account). Penalties for willful failure: up to 50 percent of account value or 100,000, whichever is greater. Criminal penalties for severe violations.
What is FATCA Form 8938 and how does it differ from FBAR?
Form 8938 is the FATCA reporting requirement under Section 6038D, filed with the tax return. Required if specified foreign financial assets exceed thresholds: 50,000 single or 100,000 MFJ at year end (or 75,000/150,000 at any time during the year) for US residents. Higher thresholds for taxpayers living abroad.
FATCA covers a broader scope than FBAR (includes foreign stock not in custodial accounts, foreign partnership interests, foreign mutual funds) but has higher thresholds.
Both forms are required for many taxpayers. They report similar but not identical information. FBAR penalties are higher per account but capped per filing. FATCA penalties are 10,000 per year for non filing plus 10,000 for each 30 days over 90 days notification period.
How are nonresident aliens taxed in the US?
Nonresident aliens (NRAs) are taxed only on US source income. Two categories: Effectively Connected Income (ECI, from US trade or business) is taxed at graduated rates with allowed deductions; Fixed Determinable Annual Periodical (FDAP) income is taxed at a flat 30 percent unless reduced by treaty (often 0, 5, 10, or 15 percent for treaty residents).
NRAs file Form 1040-NR. No standard deduction (with limited exceptions for India treaty residents and students), no personal exemption since 2018, no head of household, restricted itemized deductions.
Determining nonresident status: failed both the Green Card Test (no LPR status) and the Substantial Presence Test (less than 31 days current year, or weighted total under 183 days). Closer connection exception, treaty tie breaker, dual status returns add complexity.
How do I apply for an ITIN?
ITIN (Individual Taxpayer Identification Number) is for individuals required to file US taxes who are not eligible for an SSN. Apply via Form W-7 with required identity documentation. ITINs are issued by the IRS, not the SSA.
Three application paths: mail original or certified copies of identity documents to Austin TX with Form W-7 and a tax return, work with a Certified Acceptance Agent (CAA) who verifies documents in person, or apply at an IRS Taxpayer Assistance Center.
Processing typically takes 7 to 11 weeks. ITINs are required for filing a return claiming dependents who do not have SSNs and for spouses on joint returns. ITINs do not authorize work; do not establish residency or immigration status.
What is the substantial presence test?
The Substantial Presence Test determines US tax residency for non citizens. Met if you are present in the US at least 31 days during the current year AND 183 days counting current year plus one third of the year before plus one sixth of the year before that.
Days counted: any day with any time in the US except limited categories (transit days, days as crew member, days unable to leave due to medical, days as exempt individual under student/teacher/diplomat statuses).
Failing SPT does not necessarily mean nonresident if the Closer Connection Exception or a treaty tie breaker applies. Form 8840 documents the closer connection claim.
Can I use a tax treaty to reduce tax?
Yes, in many cases. The US has tax treaties with about 70 countries. Treaty benefits can include reduced withholding rates on dividends/interest/royalties, exemption from US tax on income earned in the US for short stays (saving clauses limit some benefits to non US persons), and tie breaker rules for dual residents.
To claim treaty benefits, file Form 8833 with your return when the position is outside the most ordinary application. For withholding, give Form W-8BEN to the payer.
Treaty positions that reduce US tax owed on income that would otherwise be subject to US tax must be disclosed. Failure to disclose can result in penalties even if the treaty position is valid.
How does dual status alien filing work?
A dual status alien is someone who is a resident for part of the year and a nonresident for the other part (typically the year of arrival or departure). Files two parts to one return: Form 1040 for the resident period plus Form 1040-NR statement for the nonresident period.
Income earned during the resident portion is worldwide income. Income earned during the nonresident portion is only US source. Some deductions and credits are unavailable; standard deduction is generally not allowed.
First year choice election may be available to be treated as a resident for the entire year, often advantageous if married to a US citizen who can MFJ. Form 1040 with statement; cannot itemize and take standard deduction.
What about expatriating from the US?
US citizens and long term green card holders (resident in 8 of last 15 years) may face an expatriation tax under Section 877A when they renounce US citizenship or surrender LPR status. The exit tax is a mark to market deemed sale on a covered expatriate's worldwide assets above an exclusion (estimated 866,000 in 2026).
Covered expatriate test: net worth over 2 million, average tax over 5 year prior years above threshold (estimated 206,000 in 2026), or failure to certify 5 year tax compliance. Form 8854 is the expatriation reporting form.
Exit tax planning is complex and irreversible once executed. Get specialized advice. Some assets (deferred compensation, specified tax deferred accounts) follow special rules and are not subject to mark to market.
How do retirement accounts work with foreign income?
US qualified retirement plans (401k, IRA) require US source earned income to contribute. FEIE excludes income for the contribution test, so a US expat using full FEIE may not have eligible compensation for IRA contribution. Use Bona Fide Residence Test plus partial FEIE plus FTC if you want to contribute to a US IRA.
Foreign retirement accounts vary widely in US tax treatment. Some treaty countries' equivalents are recognized under specific rules (UK ISAs and Canadian RRSPs). Others may be treated as foreign trusts (Form 3520, 3520-A) with onerous reporting.
Foreign mutual funds held outside qualified accounts may be Passive Foreign Investment Companies (PFICs) with punitive tax treatment under Section 1291. Avoid foreign mutual funds in taxable accounts; the cure is worse than the gain.
What is GILTI and Subpart F?
GILTI (Global Intangible Low Taxed Income, Section 951A) is a tax on US shareholders of Controlled Foreign Corporations (CFCs) on certain types of foreign earnings. Reported on Form 8992. Mostly affects multinational businesses; some closely held foreign C corps owned by US individuals also fall under GILTI.
Subpart F income (Sections 951 to 964) is certain types of income earned by CFCs that is currently taxable to US shareholders even if not distributed (passive income, certain related party transactions, insurance, sales subsidiary income).
Both regimes are technical and require Forms 5471, 8865, and other CFC informational filings. Penalties for non filing are severe (10,000 to 50,000 per form per year). Foreign business owners should not attempt without specialized help.
Where can I get international tax help?
Contact Amanda directly for international tax preparation. Multi state and international preparation requires the Planning or Full Picture membership level. Complex situations (Form 5471, GILTI, expatriation) may need referral to a specialist; Amanda will tell you upfront.
Free authoritative sources: IRS Publication 54 (US citizens and resident aliens abroad), Publication 519 (US tax guide for aliens), Publication 901 (US tax treaties), Publication 597 (Canada specific guidance).
For FBAR filing, fincen.gov is the only official source. Do not pay third party services for what is a free filing. Same for FATCA Form 8938 (filed with return).
Need help applying this to your situation?
This guide explains the rules. Applying them is what year round advisory is for. Book a call with Amanda.