Foreign Income and IRS Reporting: What U.S. Taxpayers Should Know in 2025

After more than a decade working in U.S. tax, we’ve heard the same sentence from countless clients:
“I didn’t know I had to report that.”

Often, it’s someone who spent time working abroad, inherited a foreign bank account, or owns property overseas. They’re not hiding income — they simply weren’t aware that something outside the U.S. could still fall under IRS rules. The truth is, the U.S. tax system applies broadly, and many taxpayers may need to report income, accounts, or assets they didn’t think were relevant.

This post outlines what individuals subject to U.S. taxation might consider if they have foreign ties in 2025.

Yes, the IRS Wants to Know About Your Foreign Income

U.S. citizens and green card holders are generally taxed on their worldwide income, regardless of where they live or where the income was earned. Even if taxes were already paid abroad, reporting may still be required.

Examples of foreign income that may need to be disclosed include:

• Salary or wages earned abroad

• Rental income from foreign property

• Dividends or interest from non-U.S. financial accounts

• Distributions from foreign pensions or retirement plans

• Self-employment income from services performed while living and working abroad

It may not matter whether the amount involved is large or small — if the source is foreign, there could be a reporting obligation.

Does That Mean You’ll Owe More U.S. Tax on Foreign Income? Not Necessarily.

Just because foreign income must be reported doesn’t mean you’ll owe additional U.S. tax. In many cases, one of two key provisions may reduce — or even eliminate — your U.S. tax liability on foreign earnings:

Foreign Earned Income Exclusion (FEIE)

If you live and work abroad and meet specific IRS requirements, you may be able to exclude up to $130,000 of foreign wages or self-employment income from U.S. taxation for 2025, using Form 2555.

To qualify, you must have a tax home in a foreign country and meet one of these two tests:

• Physical Presence Test (PPT): Present in foreign countries for at least 330 full days in a consecutive 12-month period

• Bona Fide Residence Test (BFR): Uninterrupted residence in a foreign country for an entire tax year

This exclusion may be especially helpful for those living in low-tax countries, like Hong Kong or Singapore, where U.S. tax could otherwise exceed local tax paid.

Foreign Tax Credit (FTC)

If you’ve already paid income tax to a foreign government on the same income, you may be eligible to claim a Foreign Tax Credit via Form 1116. This can reduce or eliminate your U.S. tax liability on that income.

The credit may be particularly effective for U.S. taxpayers residing in higher-tax countries, such as Canada, the UK, or Germany.

Sometimes, It’s Both

Some individuals use the FEIE to reduce taxable earned income and the FTC to offset tax on other foreign-source income like dividends or rent. If foreign income exceeds the FEIE cap, the credit may still reduce your remaining U.S. tax.

Unsure which applies to you? Contact us to review your options and chart the right path forward.

Examples of Situations That May Require Additional Reporting

In our experience, taxpayers are often unaware of how certain situations can trigger filing requirements. Some examples include:

• An employee who lived and worked abroad for over 330 full days in a 12-month period may be eligible for the FEIE but must affirmatively file Form 2555.

• A student who opened a bank account while studying abroad, where the balance exceeded $10,000 at any time during the year, may have triggered an FBAR filing requirement — regardless of how much interest the account earned.

• A retiree receiving distributions from a foreign pension may assume the income is exempt from U.S. tax under an income tax treaty. However, many treaties — including the U.S.–U.K. treaty — contain a savings clause that allows the U.S. to continue taxing its citizens as if the treaty didn’t exist. As a result, the pension income may still be taxable in the U.S., and may also require reporting on Form 8938, Schedule B, or other disclosures, depending on the structure of the plan.

• A client investing in a UK Individual Savings Account (ISA) or Canadian Tax-Free Savings Account (TFSA) may assume their investments are tax-free in the U.S. as well. But here’s the catch: the U.S. often treats foreign mutual funds and ETFs inside those accounts as Passive Foreign Investment Companies (PFICs) — and those come with special reporting rules. If PFIC rules apply, you may need to file Form 8621, and any future gains or withdrawals could be taxed at higher rates under Section 1291. Even though these accounts are tax-friendly in their home countries, they can carry U.S. tax complexity if left unaddressed.

Not sure how your foreign savings account fits into your U.S. filing obligations? Contact us.

IRS Forms That May Apply in 2025

2025 Form 8938 Reporting Thresholds

Form 8938 (under FATCA) and the FBAR (FinCEN Form 114) are both foreign asset reporting tools — but they’re different, and you may need to file one, both, or neither depending on your situation.

• Form 8938 is filed as part of your U.S. income tax return (Form 1040). It covers a broad range of foreign assets, including some that the FBAR doesn’t.

• FBAR is filed separately through the BSA E-Filing System and focuses on foreign bank and financial accounts exceeding certain thresholds

For an official side-by-side comparison from the IRS, see: Comparison of Form 8938 and FBAR requirements

Important: Even if your foreign accounts are already reported on the FBAR, you may still need to file Form 8938 — and vice versa. The triggers and rules aren’t identical

Heads-Up: Already Reported the Income but Missed the FBAR?
If you’ve already reported your foreign income and paid any tax due, but forgot to file the FBAR, you may still have options. As long as you’re not under audit and haven’t been contacted by the IRS about the missing forms, it’s possible to resolve the issue by filing late with an explanation — often without penalties.
Contact us to find out if this path could apply to your situation

Foreign Pensions Might Come with Extra Forms

Foreign pensions are commonly reportable on both the FBAR and Form 8938 — even if you’re not currently receiving distributions. But that’s not always where the story ends.

Some retirement accounts abroad may be treated as foreign grantor trusts, requiring additional disclosures:

• Form 3520 – Filed by individuals who receive distributions or transfer money to a foreign trust

• Form 3520-A – Filed annually by the trust (or sometimes by the individual on its behalf)

Accounts that could fall under these rules include:

• UK Self-Invested Personal Pensions (SIPPs)

• Australian Self-Managed Super Funds (SMSFs)

• New Zealand KiwiSaver plans

Whether or not these forms are required depends on how the plan is structured, what control or access you have, and how the IRS interprets the arrangement.

If you hold a foreign pension, we can help determine the right filings and avoid unpleasant surprises. Email us at contact@americantaxfilings.com.

What Happens If You Miss These Requirements?

The IRS may assess penalties when a taxpayer fails to file required foreign information forms — even if no tax is due. Some examples, based on the most recent 2024 limits, include:

Quick Note on Enforcement: While the penalties above are authorized by law, actual enforcement varies:

• For Forms 3520 and 3520-A, the IRS announced in October 2024 that it would stop automatically assessing penalties on late-filed forms. Instead, the agency would review reasonable cause statements before imposing penalties — a welcome shift for taxpayers who voluntarily correct honest mistakes. While this change was announced publicly by IRS Commissioner Danny Werfel and the National Taxpayer Advocate, it has not yet been codified in formal guidance.

• FBAR penalties have historically been pursued more actively, particularly in willful or high-balance cases. But following Bittner v. United States, non-willful violations are now assessed per form, not per account — significantly reducing exposure for good-faith filers.

• Form 8938 and 5471 penalties are real but often arise in high-profile or persistent noncompliance situations — not usually from a single honest mistake.

Bottom line: If you’ve missed one or more of these filings, don’t panic — but don’t ignore it. Voluntary correction and timely advice can often prevent penalties and keep your compliance on track.

Final Considerations

This post is meant to raise awareness of common foreign reporting obligations — not provide legal or tax advice. Every situation is different, and the right path depends on your unique facts and goals.

Think you might be affected? Let’s talk. We’re here to help you understand your U.S. tax responsibilities and make confident decisions, one step at a time.

Whether you’re ready to file, need a second opinion, or just want to explore your options — feel free to email us at contact@americantaxfilings.com.