Citizenship-based taxation

Updated on April 02, 2026

Aya Takriti, an IRS Enrolled Agent with 12 years of expat tax experience, specializes in US tax preparation, tax planning and tax advice for US citizens and Green Card holders living and working in the Middle East. *Schedule a consultation with Aya today.

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Citizenship-based taxation: What US expats need to know in 2026

Citizenship-based taxation means the US requires its citizens to report their worldwide income, even if they live abroad. Green card holders are generally subject to similar US tax rules as US tax residents under the green card test, which is why they may also need to report global income while living outside the US.

What tends to confuse people is what this actually means in real life. Filing doesn’t always mean paying. And the rules are more manageable than they first appear.

Let’s break it down in a way that actually makes sense.

What is citizenship-based taxation?

Citizenship-based taxation means the US requires its citizens and green card holders to report their global income, regardless of residence.

In practical terms:

Your income is still visible to the IRS
Living abroad does not remove filing obligations
You may still owe tax, but often you don’t

This system is unusual. Most countries follow a different approach, which leads to confusion.

Citizenship vs residency taxation: What’s the difference?

Citizenship-based taxation means you are taxed by the US even if you live abroad, while residency-based taxation means you are taxed mainly where you live and earn income.

Key differences at a glance:

Feature	Citizenship-based taxation	Residency-based taxation
Who is taxed	US citizens and US tax residents (including green card holders)	Residents of the country
Does where you live affect taxes?	US filing is required abroad, but your location can affect tax outcomes	Yes
What income is taxed	Worldwide income	Usually local or residency-based
Filing requirements when living abroad	Required in most cases	Often not required
Countries using this system	Primarily the US	Most countries (e.g., Australia, Canada, the United Kingdom)

Seeing this side-by-side, one question usually comes up.

If most countries tax based on residency, why does the US take a different approach?

Why does the US use citizenship-based taxation?

The US uses citizenship-based taxation because it treats citizenship as an ongoing connection that can carry tax responsibilities, even when you live abroad.

There isn’t a single official rule that explains why this system exists. However, a few commonly cited policy reasons include:

Continued access to US protections and services
A desire to reduce tax avoidance by moving income offshore
Historical precedent, as the system dates back to the American Civil War

However, the system is often criticized by expats. Being taxed by two countries, even if credits apply, can create extra filing requirements, compliance costs, and confusion.

That is why the US provides relief tools such as the Foreign Tax Credit and Foreign Earned Income Exclusion.

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Do US expats actually pay tax twice?

Short answer: Most US expats do not pay tax twice, but it depends on your circumstances.

Most Americans abroad reduce or eliminate double taxation through:

Foreign Earned Income Exclusion (FEIE)
Allows you to exclude up to US$130,000 (2025 tax year) of foreign earned income if you qualify
Foreign Tax Credit (FTC)
Lets you offset US tax with taxes paid to another country

Here’s a simple way to think about it:

Situation	Typical outcome
Living in a high-tax country (e.g. the UK, France)	Often, no US tax owed due to credits
Living in a low-tax country	Possible US tax liability
High income above FEIE limit	Partial US tax may apply

In other words, most expats still need to file, but many do not end up owing additional US tax.

What does this mean for your tax filing?

It means you may still need to file a US tax return and report your worldwide income, even while living abroad.

In practice, citizenship-based taxation translates into a set of filing obligations. Once you understand what needs to be reported and which tax relief tools apply, the process becomes more straightforward.

Do I need to file a US tax return as an expat?

Most US citizens living abroad need to file a US tax return if they exceed income thresholds or have certain foreign financial accounts.

A simple way to check:

Are you a US citizen living abroad?
Did you earn more than the IRS filing threshold?
Are you self-employed with at least US$400 of net earnings?
Do you have foreign accounts exceeding US$10,000 in total at any point during the year (FBAR threshold)?

If you answered yes to any of these, you likely need to file a US tax return.

Step-by-step: How it works for expats

1. Check if you meet filing thresholds
For the 2025 tax year, filing requirements depend on your status, age, and situation. Common thresholds include:

US$15,750 (single, under 65)
US$31,500 (married filing jointly, both under 65)
US$400 if self-employed

2. Report your worldwide income
This includes salary, freelance income, rental income, and investments, regardless of where the income is earned.

3. Apply exclusions or credits
Use the Foreign Earned Income Exclusion (FEIE) or Foreign Tax Credit (FTC) to reduce or eliminate double taxation.

4. File additional forms if needed

FBAR (if foreign accounts exceed US$10,000 in total at any point during the year)
Form 8938 (if you meet higher foreign asset thresholds)

5. Submit your return
Expats get an automatic extension to June 15. However, any tax owed is still generally subject to interest starting from the original April due date, even if you file later.

It can feel overwhelming at first, but once you understand how the process works, it becomes far more manageable.

Common mistakes expats make

Expats often assume they do not need to file, misunderstand how double taxation works, or overlook required reporting, such as foreign accounts.

These issues usually come from confusion around the rules rather than intentional mistakes, especially for those filing abroad for the first time.

Here are some of the most common mistakes US expats tend to make:

Assuming they don’t need to file
Many expats think leaving the US ends their tax obligations. It doesn’t
Confusing filing with paying
Filing is required more often than paying
Ignoring foreign account reporting (FBAR)
This one catches people off guard
Using the wrong tax relief strategy
FEIE versus FTC decisions can affect long-term outcomes

Does citizenship-based taxation affect investments and retirement?

Yes, certain foreign investments may be treated differently by the US, including:

Foreign mutual funds (often classified as PFICs)
Some foreign pension plans (treatment varies depending on the specific plan and any applicable tax treaty)
Non-US investment accounts

This doesn’t mean you should avoid investing abroad.
But it does mean the tax treatment may not match what your local country expects.

It’s one of those areas where general advice starts to fall short, and specifics matter more.