The double-tax shield: exclusion vs credit
Two mechanisms stop the same dollar being taxed twice, and they suit opposite situations. The foreign earned income exclusion (§911) drops a six-figure indexed slice of earned income off the return — but only through the bona fide residence test (a full calendar year abroad) or the physical presence test (330 days in any 365), and it never covers pensions, investments, or U.S.-source pay. The foreign tax credit (§901) instead credits foreign tax paid dollar for dollar against the U.S. bill. High-tax Europe: the credit usually wins. Zero-tax Gulf: the exclusion. Mixed income: run both, on different slices, and never exclude your way out of IRA eligibility without noticing.
The FBAR is the trap, not the return
FinCEN Form 114 — the FBAR — is due whenever your aggregate foreign accounts top $10,000 at any point in the year, filed electronically and separately from the tax return. Non-willful penalties reach $10,000 per account per year; willful violations reach the greater of $100,000 or half the balance, per year, with criminal exposure behind that. Form 8938 (FATCA) stacks a second disclosure at higher thresholds, filed with the return. Most expat horror stories are FBAR stories — the return was fine, the separate filing nobody mentioned was not.
The quiet way back: streamlined procedures
Years unfiled abroad are fixable without drama if the failure was non-willful: the Streamlined Filing Compliance Procedures take three years of returns, six years of FBARs, and a narrative statement, for a single 5% miscellaneous offshore penalty — zero for taxpayers who qualify as foreign residents. The narrative matters: it must credibly show negligence, not intent, because willful cases belong with counsel under privilege, not in a streamline. File the streamline before the IRS contacts you; after first contact the door closes.
The state you left may not have left you
California, New York, Virginia, and a handful of others presume you never left until you prove otherwise — voter registration, driver's license, property, and bank accounts all count as ties. Remote workers hopping countries on tourist visas collect the worst of both worlds: no foreign residence to claim, and a U.S. state still billing. Sever ties deliberately, document the departure year, and file the part-year return that closes the door. The federal return is only half the expat filing.
Frequently Asked Questions
- Yes — the U.S. taxes citizens and residents on worldwide income wherever they live. The foreign earned income exclusion and foreign tax credit prevent most double tax, but the return itself is still required every year above the filing threshold.
- High-tax country: usually the credit — it wipes the U.S. bill dollar for dollar and preserves IRA eligibility. Low- or no-tax country: usually the exclusion — a six-figure indexed slice of earned income drops off the return. Many returns run both, on different income.
- Non-willful violations run up to $10,000 per account per year; willful violations run to the greater of $100,000 or half the account — per year. The streamlined procedures exist precisely for non-willful catch-ups: three returns, six FBARs, one penalty, done.
- Yes, through the Streamlined Filing Compliance Procedures — if the failure was non-willful. Three years of returns, six years of FBARs, a narrative statement, and a single 5% miscellaneous offshore penalty for domestic filers (zero for qualifying foreign residents). Willful cases need counsel, not a streamline.