Six ways to reduce US tax while living abroad
Every one of these is a decision, and most of them close on 31 December. None is universally right — each carries a trade-off, and the reason advice is worth anything is that the trade-offs interact.
1. The Foreign Earned Income Exclusion
The exclusion removes foreign earned salary from US taxable income up to a cap — $130,000 for tax year 2025 — once you pass either the physical presence test or the bona fide residence test. It is the largest single lever for most people abroad.
The trade-off: excluded income is no longer income for other purposes, which matters in the fifth item below.
2. The foreign housing exclusion
Housing costs above a base amount can be excluded on top of the exclusion, subject to a cap that varies by location. In expensive cities this is the item most often left unclaimed, usually because nobody asked what the rent was.
3. The foreign tax credit instead
Where your host country taxes you heavily, the credit frequently beats the exclusion: it offsets US tax with foreign tax already paid, and it leaves the income in place. In a country with little or no income tax there is nothing to credit, and the exclusion wins easily.
The trade-off is severe and often missed: revoking the exclusion once claimed binds you for five years without IRS consent. This is a decision to make deliberately, not to drift into.
4. Timing the move
The physical presence test runs over any rolling twelve months, so in an arrival or departure year the period you choose decides how much of the cap you actually get. Leaving in January rather than December can change the exclusion, the housing exclusion and your state position in a single step.
5. Retirement contributions
Excluded income does not count as compensation for IRA purposes. Exclude everything and you may find you cannot fund an IRA at all. Using the credit instead keeps the income included and the door open — often the deciding factor for people still building retirement savings.
6. State residency
Federal relief does nothing about a state that still considers you domiciled there. Breaking that connection properly is frequently worth more than any federal election, and it is the one item on this list that nobody does by accident.
IRC §911, §901 and §219; IRS Publication 54; Forms 2555 and 1116 instructions. The exclusion cap is $130,000 for tax year 2025; the housing base and cap vary by location. Checked 13 September 2026.
Which of the six actually applies to you?
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