How to report US taxes on foreign income: 2025 guide

This publication is provided for general information purposes and does not constitute legal, tax or other professional advice from Wise US Inc. or its affiliates, and it is not intended as a substitute for obtaining business advice from a Certified Public Accountant (CPA) or tax lawyer.

Making money abroad feels great — until you remember the IRS still wants a piece. If you’re a US citizen or resident, your tax bill doesn’t stop at the border.

Unlike most countries, the US taxes its people on worldwide income, no matter where they live or work. But before you start budgeting for double taxation, don’t worry — there are ways to avoid paying twice. The Foreign Earned Income Exclusion (FEIE)¹ and Foreign Tax Credit (FTC)² can significantly reduce what you owe, sometimes to zero.

The catch? You have to report everything correctly. Miss a form, and the IRS won’t care that you didn’t mean to. Let’s break down what you need to know to stay compliant, keep more of your money, and avoid awkward letters from the government.

In this article we'll look at:
What is foreign income? What foreign income is taxable in the US? Are there any tax exemptions on foreign income? Need to pay your US taxes? Have foreign income? Meet Wise How to report foreign income for US taxes What happens if you don’t report foreign income?

This article has been written in collaboration with Katelynn Minott, CEO and Managing CPA at Bright!Tax US Expat Tax Services.

What is foreign income?

For tax purposes, foreign income is any money you earn outside the US. It doesn’t matter whether you’re a US citizen living abroad or just picking up extra cash from an overseas gig — if the income comes from a foreign source, the IRS wants to know about it.

Foreign income falls into two main categories:

• Earned income: Money you actively work for, like salaries, wages, freelance income, and self-employment earnings
• Unearned income: Money that works for you, including investment earnings, rental income, pensions, dividends, and royalties

Location matters, but not in the way you might think. Even if you’re sitting in the US while working remotely for a foreign company, the IRS still considers that foreign income. And if you’re an expat earning a paycheck overseas, it counts too — whether or not you bring it back to the US.

In short, if money is flowing into your bank account from activities outside the US, the IRS classifies it as foreign income — and it needs to be reported. The next question is whether it’s taxed.

What foreign income is taxable in the US?

Not all foreign income is taxed the same way. Some income can be excluded, some can be offset with credits, and some is taxed just like US earnings.

The IRS wants everything reported, but that doesn’t mean you’ll owe taxes on it all. Understanding the exemptions and credits available is what makes the difference.

When foreign income is taxed?

Taxation depends on three factors:

1. Type of income: Earned income (salaries, wages, self-employment) is treated differently from passive income (investments, rentals, pensions)³

2. Foreign tax due: If you’ve already paid or owe taxes on the income to another country, you may be able to offset your US tax bill with the Foreign Tax Credit (FTC)⁴

3. Your residency status: If you qualify for the Foreign Earned Income Exclusion (FEIE), a portion of your foreign salary or self-employment income may be tax-free

Foreign earned income vs. foreign passive income

• Foreign earned income: This includes wages from a foreign employer, freelance income from overseas clients, or money you make running a business abroad. It’s eligible for the FEIE, meaning you may not owe US taxes on some or all of it
• Foreign unearned income: This includes rental income, dividends, interest, and capital gains from foreign sources. Passive income is not eligible for the FEIE and is generally taxable, but you may be able to offset foreign taxes paid using the Foreign Tax Credit

What about non-resident aliens?

While US citizens and resident aliens must report everything worldwide, non-resident aliens (NRAs) are only taxed on US-source income.⁵ This means that if you’re a non-citizen living abroad with no US earnings, the IRS isn’t interested in your foreign income.

However, NRAs who earn income inside the US — such as rental income from a US property — must report and pay taxes on that income.

Are there any tax exemptions on foreign income?

Just because the IRS taxes worldwide income doesn’t mean you have to pay twice on every dollar you earn abroad.

Two major tax breaks — the Foreign Tax Credit (FTC) and the Foreign Earned Income Exclusion (FEIE) — can significantly reduce or eliminate your US tax bill, depending on your situation.

The Foreign Tax Credit (FTC)

If you’ve already paid taxes to a foreign government, the Foreign Tax Credit lets you claim a dollar-for-dollar credit against your US tax liability.

This is especially useful for expats living in high-tax countries, where foreign tax rates may be equal to or higher than US rates, potentially canceling out your US tax bill entirely.

Best for: Expats and US taxpayers earning passive income (rental income, dividends, investments) abroad

How to claim: File Form 1116 with your US tax return⁶

The Foreign Earned Income Exclusion (FEIE)

For those working overseas, the Foreign Earned Income Exclusion (FEIE) allows you to exclude a portion of your foreign salary or self-employment income from US taxes.

For the 2025 tax year, the exclusion limit is $130,000 per qualifying individual.⁷ This means if you earn less than this amount abroad, you may owe no US tax on that income at all.

However, not all types of foreign income qualify:

• Excludable: Wages, salaries, and self-employment income earned in a foreign country
• Not excludable: Rental income, dividends, interest, capital gains, or pensions — these still count as taxable income in the US

Best for: US expats earning wages or self-employment income abroad

How to qualify: You must meet one of two tests:

• Physical Presence Test: Spend at least 330 days in a foreign country within a 365-day period⁸
• Bona Fide Residence Test: Prove that you are a resident of another country for at least one calendar year⁹

How to claim: File Form 2555 with your US tax return¹⁰

Which one should you use?

• If you live in a country with high taxes, the Foreign Tax Credit is usually more beneficial
• If you live in a country with low or no income taxes, the Foreign Earned Income Exclusion helps you avoid paying US tax on your earnings
• In some cases, you can use both — claiming the FEIE on a portion of your income and using the FTC for any remaining foreign taxes paid

Even tax-free income must be reported

Earning tax-free income doesn’t mean you can skip filing altogether. All foreign-earned income must still be reported to the IRS.

If you fail to file, you risk penalties, audits, or even losing the right to claim the exclusion in future years.

For expats and remote workers abroad, the FEIE is a powerful tool to reduce US tax liability — but it’s only useful if you claim it correctly.

Need to pay your US taxes? Have foreign income? Meet Wise

Paying for your US taxes or receiving a tax refund can be tricky – the payment options are often slow and costly, and this doesn’t get better when you’re not in the country and/or manage different currencies.

Whether you’re a US expat, a resident alien, or you have a foreign business, Wise can be an excellent option. With a Wise account, you can either pay your taxes from abroad or receive your tax refund easily. And if you manage more than one currency, you’ll save a lot on exchange rate mark-ups and conversion fees.

When you fill out your tax forms, use your Wise USD Account and routing numbers.

You can find them under “Account Details.” This will let you:
Use direct debit to pay your taxes straight from your Wise account, avoiding the fees from other payment methods offered by the IRS Set up a direct deposit, the fastest way to receive your tax refund, to your Wise USD account details

Wise has no subscription fees or minimum balance requirements, and you can set up an account in minutes¹⁷.

You can send, receive, hold and spend your money in multiple currencies, always with the real exchange rate, and just with a small and transparent fee¹⁸.

Get a Wise Account
in minutes 🚀

How to report foreign income for US taxes

Filing foreign income taxes means navigating a maze of IRS forms. Depending on your situation, you may need to exclude earnings, claim a credit, or simply report your foreign accounts.

Here’s what you need to file and when.

Key IRS forms for reporting foreign income
Form 1040 (US Tax Return): All US citizens and resident aliens must report worldwide income on their annual tax return, even if no tax is owed¹¹
Form 2555 (Foreign Earned Income Exclusion): If you qualify for the Foreign Earned Income Exclusion (FEIE), use this form to exclude up to $126,500 in 2024 from taxable income¹⁰
Form 1116 (Foreign Tax Credit): If you’ve already paid taxes to a foreign country, use this form to claim a dollar-for-dollar credit against your US tax bill⁶

FBAR and FATCA: when extra reporting is required

Some foreign financial holdings require separate reporting beyond the tax return:

• FBAR (FinCEN Form 114): Must be filed if your total foreign bank account balances exceed $10,000 at any time during the year. Filed separately with the Financial Crimes Enforcement Network (FinCEN), not the IRS¹²

• FATCA (Form 8938): Required if your foreign financial assets exceed $200,000 (for expats) or $50,000 (for those in the US). This form is submitted with your tax return¹³

Step-by-step guide to filing foreign income

1. Gather your income records: Collect all pay stubs, tax documents, and financial statements related to your foreign income

2. Determine your tax benefits: Decide whether to exclude income (FEIE) or claim a credit (FTC) to reduce your tax liability

3. Complete the required forms: Fill out Form 2555 if using the FEIE, Form 1116 for the FTC, and FBAR/FATCA forms if applicable

4. File your tax return on time: US expats get an automatic two-month filing extension (until June 15) but must still request an extension if they need more time

5. Keep detailed records: The IRS has strict penalties for misreporting foreign income, so save your tax filings and financial documents for at least six years

Failing to file the right forms can lead to penalties, audits, or losing access to tax-saving exclusions and credits. Staying organized and meeting deadlines is key to avoiding unnecessary problems.

What happens if you don’t report foreign income?

The IRS doesn’t take foreign income reporting lightly. Whether it’s an honest mistake or intentional non-compliance, failing to report can lead to audits, fines, and in extreme cases, criminal charges.

Penalties for failing to report foreign income

• Failure to report income on Form 1040: If the IRS discovers unreported foreign income, you could face back taxes, interest, and penalties of up to 25% of the amount owed¹⁴

• Failure to file Form 2555 (FEIE) or Form 1116 (FTC): Missing these forms means losing the opportunity to exclude or offset foreign income, potentially increasing your tax bill²

• Failure to file FBAR (FinCEN 114): If your foreign bank account balances exceed $10,000, failing to file an FBAR can result in penalties of $10,000 per violation, even if the oversight was unintentional.¹⁵ Willful violations can result in fines of up to $100,000 or 50% of the account balance — whichever is greater

• Failure to file FATCA (Form 8938): Missing this form for foreign financial assets over $200,000 (expats) or $50,000 (US residents) can result in a $10,000 penalty, with additional fines for continued non-compliance¹⁶

Common mistakes that trigger IRS scrutiny

• Assuming foreign income is tax-free and not reporting it at all
• Forgetting to file an FBAR when total foreign accounts exceed $10,000
• Underreporting self-employment or freelance income earned overseas
• Thinking that foreign employer wages aren’t subject to US tax

The IRS has increased international tax enforcement in recent years, using data-sharing agreements with foreign banks to track unreported income. If they catch a mistake before you do, penalties can escalate quickly.

Final thoughts: staying compliant without the stress

Reporting foreign income may seem overwhelming, but staying compliant is far easier than dealing with IRS penalties. Most taxpayers don’t actually owe extra taxes on foreign earnings — they just need to file the right forms.

For those with complex situations — multiple income sources, foreign investments, or unfiled past returns — getting professional tax advice can be the smartest move. A tax expert can help you navigate exemptions, avoid costly mistakes, and file with confidence.

Foreign income taxes don’t have to be stressful. Stay informed, stay organized, and file on time — and you’ll keep both your money and your peace of mind.

---

This article has been written in collaboration with Katelynn Minott, the CEO and Managing CPA at Bright!Tax US Expat Tax Services. Katelynn is the CEO at Bright!Tax US Expat Tax Services, and has helped thousands of American expats become compliant with their US filing obligations over the last 10 years. She spent time as an expat herself, residing in both Chile and Brazil. She was recognized by CPA Practice Advisor's with a 40 under 40 award in 2021 and is a regular contributor to various media outlets including CNBC, Forbes, and Fast Company.

Get Wise USD details

Sources

1. IRS - Foreign Earned Income Exclusion (FEIE)
2. IRS - Foreign Tax Credit (FTC)
3. IRS - What is foreign earned income?
4. IRS - FTC: How to figure out the credit
5. IRS - Nonresident aliens sourcing of income
6. IRS - Form 1116
7. IRS - Figuring the FEIE
8. IRS - FEIE Physical Presence Test
9. IRS - FEIE Bona Fide Residence Test
10. IRS - Form 2555
11. IRS - Form 1040
12. IRS - Report of Foreign Bank and Financial Accounts (FBAR)
13. IRS - Form 8938
14. IRS - International information reporting penalties
15. IRS - Publication 5569
16. IRS - Summary of FATCA reporting for US taxpayers
17. Eligibility claim is subject to verification of customers identity
18. Please see Terms of Use for your region or visit Wise Fees & Pricing for the most up to date pricing and fee information

Sources checked 03/21/2025