For U.S. citizens and resident aliens living abroad, filing taxes has always meant dealing with complex rules surrounding foreign income, exclusions, tax credits, and currency conversion. However, the IRS has introduced key updates to Form 1040 and its supporting schedules for the 2025 tax year, making life a bit easier for Americans abroad. These changes address long-standing administrative pain points, clarify reporting obligations, and even increase tax-saving opportunities. Here’s why taxpayers living overseas have reason to celebrate in 2025.
Background: U.S. Citizens Must Report Worldwide Income
Unlike most countries, the U.S. taxes its citizens and resident aliens on their worldwide income, regardless of where they live or earn that income. This means that even if you haven’t set foot in the U.S. in years, you’re still required to file a federal tax return if you meet income thresholds.
Form 1040 remains the central document for reporting this income. Foreign income must be reported accurately, with possible relief through the Foreign Earned Income Exclusion (FEIE), Foreign Tax Credit (FTC), and certain treaty provisions. The 2025 changes help streamline these processes.
1. Foreign Earned Income Exclusion Increased to $130,000
The Foreign Earned Income Exclusion (FEIE) allows qualified taxpayers to exclude a portion of their foreign-earned income from U.S. taxation. For 2025, the exclusion amount has increased to $130,000, up from $126,500 in 2024.
What This Means: If you live and work abroad and meet either the bona fide residence test or physical presence test, you can exclude up to $130,000 of your foreign salary or wages, significantly lowering your taxable income.
Bonus: If you’re married and both spouses qualify individually, each can exclude up to $130,000, totaling $260,000.
2. Streamlined Form 2555 Filing Interface
Form 2555 is used to claim the FEIE. For 2025, the IRS has revamped this form’s integration with Form 1040, especially when filed electronically.
What’s New:
- Dynamic prompts in major tax software to determine FEIE eligibility
- Built-in foreign currency converters linked to U.S. Treasury rates
- Clearer guidance on housing exclusions and expense limits
This reduces the need to manually input foreign currency exchange rates and simplifies multi-year filers’ experiences with overlapping residency periods.
3. Increased Foreign Housing Exclusion Limits
In addition to the FEIE, qualified individuals may also exclude housing expenses above a base amount. For 2025, the standard housing expense base is $18,200 annually (or $50 per day), while high-cost city thresholds have also been updated.
Example: For residents in cities like London, Hong Kong, or Tokyo, the housing expense limit may exceed $35,000, allowing for greater tax relief.
4. Foreign Tax Credit (Form 1116) Simplifications
The Foreign Tax Credit (FTC) offers a dollar-for-dollar credit for foreign taxes paid on income also taxed by the U.S. For 2025, the IRS has issued clearer instructions and software updates for Form 1116, including:
- Simplified reporting of carryover credits from prior years
- Streamlined calculations for passive category income (e.g., dividends and interest)
- Elimination of duplicative disclosures for treaty-covered income
Benefit: These updates reduce paperwork and minimize the chance of double taxation—particularly helpful for expats with foreign investment income or self-employment income subject to local tax.
5. Currency Conversion Tools Now Officially Supported
For 2025, the IRS has endorsed using its own online currency conversion tool for converting foreign income to U.S. dollars. The annual average exchange rates are now linked within Form 1040 e-filing software, helping avoid errors caused by using inconsistent or unverified third-party sources.
This tool aligns with Treasury guidelines and offers transparency for audits or amended returns.
6. Automatic Extensions and Virtual Presence Considerations
Taxpayers abroad continue to benefit from the automatic 2-month filing extension—until June 15, 2026, for 2025 tax returns. What’s new is the increased acknowledgment of virtual presence and digital nomad arrangements.
New Guidance: Taxpayers living in one country while working remotely for another now receive clearer instructions on how to document their foreign-earned income eligibility and days of presence.
This is especially helpful for remote tech workers and entrepreneurs who split time between multiple countries during the year.
7. Clearer Disclosure Rules for Foreign Bank Accounts
Though not technically a part of Form 1040, the Foreign Bank Account Report (FBAR) and Form 8938 (Statement of Specified Foreign Financial Assets) are required for many overseas taxpayers. In 2025, the IRS has provided:
- Clear thresholds for filing: FBAR required if aggregate foreign account balance exceeds $10,000
- Form 8938 required if specified financial assets exceed $200,000 for individuals living abroad ($400,000 for joint filers)
- Improved prompts in tax software to trigger compliance questions
Outcome: Reduces the risk of penalties due to unintentional non-compliance, especially for dual citizens with long-standing accounts abroad.
8. Expanded Eligibility for the Child Tax Credit
In prior years, the refundable portion of the Child Tax Credit was disallowed for many expats due to lack of U.S.-based earned income. For 2025, while the maximum credit remains $2,000 per child, the IRS has expanded guidelines for applying the refundable portion to U.S. citizens living abroad who meet residency and income thresholds.
This is good news for families with children under age 17 living outside the U.S., as more will now qualify for the Additional Child Tax Credit (ACTC) of up to $1,600.
9. Recognition of Foreign Retirement Plans
Historically, U.S. tax treatment of foreign pension plans has been murky and inconsistent. In 2025, the IRS has issued updated guidance recognizing select foreign retirement plans—particularly those in treaty countries like the U.K., Canada, and Australia—as qualified for deferral or exemption under tax treaties.
This change reduces double taxation and ensures consistent treatment of foreign retirement income when reporting on Form 1040 and associated schedules.
10. Inclusion in IRS Online Account and Transcripts
Beginning in 2025, Americans living abroad can now register for IRS Online Accounts more easily, thanks to enhancements in identity verification for foreign-based users. This enables better access to transcripts, payments, and previous tax returns from anywhere in the world.
Additionally, overseas taxpayers can now opt-in to receive IRS notices electronically, cutting down on international mail delays that often result in missed deadlines.
Conclusion: A Welcome Step Forward for Americans Abroad
Taxpayers living abroad face some of the most complex and burdensome compliance rules in the U.S. tax system. However, the 2025 changes to Form 1040 and related foreign income forms represent a significant shift toward modernization, fairness, and digital accessibility.
With higher exclusion thresholds, streamlined forms, clearer digital asset disclosures, and new tools for tracking and converting foreign income, expatriates can now file with greater confidence and fewer headaches.
If you’re an American overseas, now is the time to reevaluate your filing approach, confirm your eligibility for new exclusions and credits, and ensure full compliance with the latest 2025 requirements. Better yet, these improvements signal a positive trend toward making U.S. tax compliance more manageable for the global citizen.
