What is double taxation: How it works & ways to avoid it
Double taxation is what happens when two different countries tax the same income. For US citizens living abroad, this isn’t just a “what if”, it’s a real thing. The US is one of the only countries that taxes its citizens no matter where they live, which means you might owe taxes both in the country you’re living in and back home.
Deborshi Choudhury, an IRS Enrolled Agent with 17 years of expat tax experience, specializes in U.S. tax preparation, tax planning, and tax advice for U.S. citizens and Green Card holders living and working in the UAE and Canada. *Schedule a consultation with Deborshi today.
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Here’s how it works: let’s say you’re working in the UK and earning a salary there. The UK taxes your income, of course. But because the US taxes worldwide income, it also wants a piece of that. Same income, two tax bills. That’s double taxation.
This kind of thing happens a lot, especially when you have employment income overseas, foreign investments, or you’re running a business abroad. Without some sort of tax planning, you could easily end up paying more than you should.
Do US citizens have to pay tax in two countries?
In some cases, yes. US citizens are usually on the hook for US taxes even if they are also paying taxes in their host country. The IRS doesn’t care that you’re living outside the US, it still expects you to file a return every year and report all your income.
Now, how much you actually end up paying in both countries depends on a few things.
The US has tax treaties with a lot of countries that help prevent much of this overlap. These treaties often spell out which country gets to tax what type of income, but not everything is covered. And not every country has a modern treaty with the US.
Another important piece is your tax residency status in your host country. Each country has its own way of determining if you’re a resident for tax purposes. It could be based on how many days you’re there, where your home is, or even where your financial and social ties are.
How can expats avoid paying taxes twice?
Luckily, US expats have a few solid tools to help reduce or completely avoid paying tax in two countries on the same income.
One of the most popular options is the Foreign Tax Credit (FTC). This gives you a dollar-for-dollar credit on your US taxes for any income tax you paid to a foreign country. For example, if you paid US$10,000 in income tax abroad, that amount can be used to offset your US tax bill. It’s a good fit if you’re living in a high-tax country.
Then there’s the Foreign Earned Income Exclusion (FEIE). This lets you exclude up to US$130,000 (for 2025) of foreign-earned income from your US taxable income. It doesn’t apply to investment income, but it works great for wages or self-employment income earned abroad, especially if you live in a country with low or no income tax.
Tax treaties also help, depending on where you’re living. These are agreements between the US and other countries that sort out who gets to tax what. Treaties can help reduce or eliminate double taxation on specific types of income, like pensions or business profits.
And finally, there are totalization agreements, which cover social security taxes. If you’re working abroad, you don’t want to pay into two social security systems at once. These agreements make sure you only pay into one, depending on your situation.
Get professional help from a tax specialist to avoid double taxation. Contact us today.
What tax planning strategies help prevent US double taxation?
First, think about timing. If you have some control over when you earn income or take deductions, try to match that with when you’re paying higher taxes abroad. For example, if your host country is taxing you heavily this year, deferring a bonus or pushing back some income to match that year could help maximize your Foreign Tax Credit.
Next, look at your housing situation. If you’re on assignment abroad, how your company structures your housing allowance, and even where you live, since it can affect how much of that cost you can exclude under the FHE. Places with higher living costs often qualify you for a bigger housing exclusion.
And finally, don’t try to do it all alone. Talk to a local tax advisor, someone who understands both your host country’s rules and the US system. They can help you avoid unnecessary tax overlap, especially if there’s a tax treaty or agreement in place that you’re not even aware of.
What IRS forms should expats use to claim relief from double taxation?
To avoid being taxed twice on the same income, there are two main IRS forms that expats tend to use: Form 1116 and Form 2555.
Form 1116 is for the Foreign Tax Credit. This form helps you claim a credit for the foreign income taxes you already paid. It’s great if you’re living in a country with higher taxes than the US or have income that the FEIE doesn’t cover, like dividends or rental income.
Form 2555 is for the Foreign Earned Income Exclusion. It lets you exclude up to US$130,000 of your earned income (for 2025) from your US taxable income. You’ll need to show that your main home is abroad and that you meet either the physical presence test (330 days out of 12 months abroad) or the bona fide residence test (you’ve settled long-term in another country).
Whichever route you go, documentation matters. Keep copies of your foreign pay stubs, tax returns from the country you live in, and travel records. If you’re ever audited, this stuff will save you big time.
FAQ'S
Does the US have tax treaties with every country?
No. The US has tax treaties with many countries, but not all. If there’s no treaty, you may have fewer protections against double taxation.
Do I still have to file a US tax return if I don’t owe anything due to the Foreign Tax Credit?
Can I use the Foreign Earned Income Exclusion if I don’t pay any foreign taxes?
Do I pay US self-employment tax if I work abroad?
Does passive income get double taxed too?
