7 common tax mistakes that American expats make and how to avoid them

Just because you move to another country doesn’t mean Uncle Sam forgets about you. Unlike most countries, the US taxes its citizens no matter where they live. So, if you’re a US citizen or a green card holder, you must file a tax return every year. Yes, even if you haven’t set foot in the US all year.

This surprises many expats. It can lead to missed deductions, skipped forms, and penalties that pile up fast.

The good news? Once you understand the basics of tax for American citizen living abroad, it’s easier to stay on track and maybe even save money.

Whether you’re a seasoned expat or just settling into life overseas, let's review the most common tax mistakes Americans make abroad and how to avoid them.

Mistake #1: Assuming you don't need to file a US tax return

This one’s everywhere. Many people assume, "I live in another country. I pay taxes here. The IRS won't care."

Wrong.

As long as your income exceeds the filing threshold, you must file a US tax return every year. It doesn't matter where the money comes from or where you live.

Here’s something else: expats get an automatic extension until June 15. But what if you owe taxes? The IRS still wants that money by April 15. If you miss the deadline, interest starts adding up.

If you skip filing altogether? You could lose out on helpful exclusions, such as the Foreign Earned Income Exclusion, or have problems renewing your passport.

Mistake #2: Skipping the Foreign Earned Income Exclusion (FEIE)

If you work abroad, this is a big deal.

The Foreign Earned Income Exclusion (FEIE) allows you to exclude up to $126,500 of foreign-earned income from your US taxes in 2024. It's a significant tax break, but you must claim it correctly.

There are two qualifying tests:

The Physical Presence Test requires that you spend 330 days in another country during a 12-month period.
The Bona Fide Residence Test requires that you live abroad permanently and can prove it.

Remember, you must file Form 2555 to claim the FEIE. What if you skip that? No exclusion. More taxes.

Many people overlook this, especially if they assume that living abroad means they’re exempt. But the IRS doesn't assume anything. If you don't request the exemption, you won't receive it.

Mistake #3: Skipping the FBAR (Foreign Bank Account Report)

Do you have foreign bank accounts? You might need to report them to the IRS.

If the total value of your foreign accounts reaches $10,000 or more at any point during the year - even if it's only for a day - you must file the FBAR (FinCEN Form 114). It’s not included in your regular tax return. You file it online separately.

Many expats assume that small or dormant accounts don't matter. But the IRS doesn’t see it that way. Miss the FBAR? You could face serious penalties, even if it was an honest mistake.

Accounts that count include:

Checking and savings.
Retirement funds
Investment accounts
Joint accounts, even if your name is only added.

Each year, add up your foreign account balances. If they exceed $10,000, file the FBAR. It's not optional.

Mistake #4: Ignoring Form 8938 (FATCA)

This is where it gets tricky. FATCA and FBAR are not the same.

Under the Foreign Account Tax Compliance Act (FATCA), US citizens living abroad must report certain foreign financial assets, such as pensions, stocks, and businesses, using Form 8938. This form is submitted with your tax return.

Do you need to file? If your total assets exceed:

$200,000 if you’re single and living abroad
$400,000 if you’re married and filing jointly,

Then yes, you do.

What are the penalties? Up to $10,000 for not filing. It's even more if they suspect you're trying to hide something.

If you're a US citizen living in the U.K., Europe, or anywhere else with foreign investments, there's a good chance that the Foreign Account Tax Compliance Act (FATCA) applies to you. What if it does? File it, along with the FBAR.

Mistake #5: Failing to use the Foreign Tax Credit (FTC)

Here’s a way to avoid paying taxes twice, but many people overlook it.

The Foreign Tax Credit (FTC) allows you to deduct taxes you’ve already paid to another country from your US tax liability. It’s claimed on Form 1116 and is particularly beneficial if you reside in a country with higher taxes than the US

Many expats think they must choose between the FTC and the Foreign Earned Income Exclusion. However, often, you can use both. What if you don’t need all the credit this year? You may be able to carry it forward to future years.

The IRS doesn't want to double-tax you. However, you must file the correct forms to prove this.

Mistake #6: Misreporting self-employment or business income

Are you freelancing from a café in Barcelona? Or running a small business in Bali? That sounds awesome! Here’s the catch, though: If you’re self-employed abroad, you still owe US self-employment tax - 15.3% to cover Social Security and Medicare.

Many expats don’t realize this. They think that living overseas gets them off the hook. Not so fast.

Unless your country has a Totalization Agreement with the US, you’re expected to pay the full tax. That includes:

Freelance gigs
Online businesses
Local LLCs - even if they operate entirely abroad

Some people underreport this income, but be careful. The IRS is improving its ability to find foreign earnings.

If you're self-employed overseas, be sure to:

Track all your income
File Schedule C and Schedule SE
Budget for that 15.3% tax hit

Don't let an unexpected bill ruin your expat lifestyle.

Mistake #7: Trying to DIY a complicated expat return

Doing your own taxes might sound like a money-saver. But what about for expats? It's often a fast track to mistakes.

Most DIY tax software isn’t designed for all the forms you’ll need, such as Form 2555 (Foreign Earned Income Exclusion), Form 1116 (Foreign Tax Credit), FBAR, and FATCA. You may even need to make tax treaty elections. That's a lot.

Even small errors, like using the wrong exchange rate or missing a required form, can lead to:

IRS letters (the kind you don’t want)
Delays in refunds
Unexpected penalties

Conclusion

Living abroad is exciting! But US tax rules? Not so much.

The good news? If you avoid the seven mistakes we’ve discussed, you’re ahead of the game.

Take the time to understand what the IRS expects. File the right forms. When in doubt, ask for help.

Need support with taxes as an American citizen living abroad? Taxes for Expats has your back. With over 20 years of experience and clients in more than 190 countries, we know how to get it right, so you won't have to worry about it.