3 Tax Mistakes American Expats Keep Making and How to Avoid Them

After 15 years of working exclusively with American expats, certain mistakes show up again and again. Not because people are careless, but because US tax rules for Americans abroad are genuinely complex, and the wrong advice travels fast.

These three mistakes are among the most costly we see. They are also the most preventable.

Mistake #1: Not using the FEIE or Foreign Tax Credit correctly

The Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC) are the two primary tools the US tax code gives expats to reduce what they owe. Most Americans living abroad qualify for one or both. Many never use them at all.

The FEIE allows you to exclude a significant portion of your foreign-earned salary from US taxable income. For 2025, that exclusion amount is $130,000. The FTC gives you a dollar-for-dollar credit for income taxes you have already paid to a foreign government. If you live in a high-tax country like Germany, France, or the UK, the FTC can in many cases substantially reduce or work to eliminate your US tax bill.

The mistakes we see tend to fall into three categories. First, not claiming either option, usually because nobody told the person they existed. Second, claiming the FEIE on income that does not qualify, such as passive income or income from a US employer that is not considered foreign-earned. Third, combining both strategies in a way that cancels out the benefit rather than compounding it.

One of our clients, a teacher in Singapore, had overpaid by about $30,000 over three years. Her accountant back home had filed her returns without understanding how the FEIE applied to her situation. She was not doing anything wrong. Her accountant simply did not know what she did not know.

That is the core issue. Expat tax is a specialty. A generalist accountant who handles domestic returns may technically be able to file your return, but understanding how to optimize it is a different skill set entirely.

If you are earning income abroad, the first question to ask your tax preparer is not “can you file my return?” It is “have you filed FEIE claims before, and how do you decide whether FEIE or FTC is the better choice for my situation?”

Mistake #2: Not reporting foreign income because you assume it does not apply

This is the mistake that surprises people most. The assumption is reasonable on its face: you live abroad, you earn money abroad, you pay taxes in the country where you live. Why would the US care?

The US cares because it taxes its citizens on worldwide income, regardless of where they live or where the money comes from. This is the principle of citizenship-based taxation, and it is largely unique to the United States. Almost every other country taxes based on residency. The US taxes based on citizenship.

What this means in practice is that rental income from a property abroad, freelance or consulting income billed in any currency, foreign pension payments from a former employer, interest and dividends from foreign bank accounts, and capital gains from the sale of foreign assets are all reportable on your US tax return.

We worked with a client who had been renting out her flat in London for six years and had never reported the income on her US return. She was not attempting to hide anything. She paid UK tax on the rental income and simply assumed that settled the matter. It did not. The IRS considers that income reportable regardless of what another country has already taxed.

The right approach is to report everything first, then apply the FEIE, Foreign Tax Credit, or applicable treaty benefits to reduce the US tax liability on that income. For many expats in high-tax countries, the foreign taxes already paid will work to offset what the US would otherwise charge. But the reporting obligation exists independent of whether you end up owing anything.

There is a related issue worth knowing about. If you have foreign bank accounts, certain foreign assets, or financial interests in foreign entities, there may be separate reporting requirements beyond your tax return through FBAR and FATCA, with penalties that can be significant if missed. 

Mistake #3: Confusing the filing extension with the payment deadline

This one catches people off guard every year. Here is what most expats know: Americans living abroad get an automatic two-month extension to file their tax return, moving the deadline from April 15 to June 15. Here is what many expats do not know: that extension applies to filing, not to payment.

If you owe taxes for the prior year, the IRS expects payment by April 15 regardless of where you live. Interest on any unpaid balance begins accruing from April 15 at the federal short-term rate plus 3%. It compounds daily.

We have seen clients receive notices with significant interest charges that came as a complete surprise. They had filed on time and done everything correctly, but because they assumed the filing extension also extended their payment deadline, they had waited until June to pay.

The practical solution is straightforward. If you think you might owe anything for the prior tax year, make an estimated payment by April 15 on the IRS official channel. It does not need to be exact. Pay your best estimate, file your full return by June 15, and settle any remaining balance then. The goal is simply to stop the interest from accruing from April.

If you are unsure whether you owe anything, that is a conversation worth having with a tax advisor before April 15, not after.

The common thread

What connects these three mistakes is the same underlying issue. US tax rules for Americans abroad are complex, they differ in important ways from what a domestic accountant handles, and the cost of getting them wrong tends to accumulate quietly until it does not.

The FEIE and FTC mistakes often go unnoticed for years. The foreign income reporting gap builds up over time. The payment deadline issue shows up in the form of an unexpected notice. None of these feel urgent until they suddenly are.

The good news is that all three are fixable. For expats who have been filing incorrectly or missing filings altogether, the IRS Streamlined Procedure offers a path to get current with reduced or no penalties in most cases.

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