Year-end tax planning tips for Americans abroad and in the US to reduce your 2025 tax bill

Year-end tax planning is about keeping more of what you earned in 2025. The steps you take now can reduce your tax bill, strengthen long-term savings, and set you up for a smooth 2026 – whether you’re in Austin, Amsterdam, Seoul, or Los Angeles.

For Americans abroad, foreign income, foreign tax payments, and cross-border reporting add extra layers. If you now live in the US (or recently returned), this guide still applies – the strategies here work for taxpayers both overseas and stateside.

Stay current on 2025 tax year changes

The One Big Beautiful Bill Act (OBBBA) increased the standard deduction and adjusted tax brackets upward for 2025. Even if you don’t expect a large US tax bill, these updates shape your tax planning year-end decisions like Roth conversions, year-end retirement contributions, and foreign tax strategy.

Standard deduction for 2025:

• Married filing jointly: $31,500
• Single or married filing separately: $15,750
• Head of household: $23,625

The IRS adjusted all current tax brackets for 2025, raising the income thresholds for each rate. Here's a detailed breakdown of the 2025 tax brackets and what they mean for you.

Tell your tax preparer about any expected income spikes or dips (bonuses, RSUs, selling property, taking distributions). They will project your 2025 tax and suggest whether shifting income or deductions into 2025 or 2026 makes sense.

Core expat decision: FEIE vs. FTC

For Americans abroad, the key year-end decision is whether the Foreign Earned Income Exclusion (FEIE) or the Foreign Tax Credit (FTC) gives the better result.

This single choice influences almost every other part of your tax plan – and guides many of your end-of-year tax strategies from retirement contributions to how your foreign taxes flow through your US tax return.

FEIE (Foreign Earned Income Exclusion)

• Excludes up to $130,000 of foreign earned income in 2025
• Requires meeting either the Physical Presence Test or the Bona Fide Residence Test
• Excluded wages do not count as compensation for IRA contributions

FTC (Foreign Tax Credit)

• Credits foreign income taxes paid against US tax on the same income
• Often best for expats living in high-tax countries who want to optimize foreign tax credits.
• Depends heavily on the timing of foreign tax payments

What to review before December 31

1. Confirm your FEIE eligibility.
   If you already use FEIE, confirm that your day-count or residency pattern still supports it for 2025, as part of your end-of-year tax planning. If you’re not yet using FEIE – or want a quick sanity check before modeling year-end moves – our Foreign Earned Income Exclusion Calculator can verify your status in seconds. It’s especially useful if you have complex travel, switched countries mid-year, or earned foreign income before returning to the US.
   By entering your travel periods, it instantly estimates how much of your 2025 foreign income you may be able to exclude.
   Find out how much income you can shield from US tax with FEIE – in seconds

   Calculate FEIE

   
2. Tell your tax preparer about foreign tax payments.
   Large, late, or irregular foreign tax payments can affect FTC calculations and carryovers. Your preparer will track Form 1116, which is needed for FTC details, but they need to know the timing of your payments.
3. If considering a switch between FEIE and FTC, review the impact on:

• retirement contribution eligibility
• credits
• student loans (IDR calculations)
• overall US + foreign tax in both countries

Student loan example
If you repay federal student loans under an income-driven repayment (IDR) plan, using FEIE may lower your US AGI and reduce your monthly payment. But that same exclusion may eliminate IRA eligibility or reduce certain credits. Using FTC keeps income visible on the US return – leading to higher IDR payments, but preserving contribution options and credit eligibility

If you live in the US, you won’t use FEIE, but the FTC may still apply if you pay foreign tax – for example, on foreign rentals, investments, or pensions.

FEIE or FTC? Find out which saves you more before the year ends

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Timing your foreign tax payments

If you use FTC, the timing of foreign tax payments or accruals affects your US return. For most individuals, foreign taxes must be paid by December 31 to be credited to the 2025 tax year.

If you’re under-withheld abroad, consider paying some foreign tax before year-end so it counts toward your 2025 FTC, and supports smart tax year-end planning. If your country normally collects 2025 tax in early 2026, ask your preparer whether you can prepay or whether it makes sense to elect the “taxes accrued” method instead.

Retirement planning: IRA, 401(k), Solo 401(k), SEP IRA

Retirement contributions are one of the most powerful year-end tax planning tools. For expats, FEIE dramatically affects eligibility.

FEIE and IRA eligibility

If FEIE excludes all your wages, your IRA contribution limit may be $0.

“FEIE-excluded wages don’t count as IRA compensation.’ If FEIE wipes out all wages, IRA contributions may be $0. A solution often includes using FTC instead to preserve compensation,” David Linh explains.

2025 retirement contribution limits

Self-employed expats

You can still contribute to a Solo 401(k) or SEP IRA even if living abroad – contributions depend on income taxed by the US.

Retirees abroad

If you live in the US, year-end is the best time to evaluate Roth conversion strategies, RMD timing, and bracket management.

For retirees abroad, RMD rules apply regardless of residency. David Linh explains:

“Your US tax is based on the USD amount on the distribution date; later currency conversion affects your spending power, not your US taxable income.”

Optimize your 2025 tax savings – get a personalized year-end tax planning session

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Expat compliance checklist

Foreign reporting is one of the most important year-end tasks for Americans abroad.

Before December 31, confirm whether any of these apply:

• FBAR (FinCEN 114): Foreign accounts > $10,000 aggregate
• FATCA (Form 8938)
• Foreign pensions
• Foreign trusts (Forms 3520 / 3520-A)
• Foreign corporations (Form 5471)
• Foreign partnerships (Form 8865)

A recent case (United States v. Boyd) shows that even small foreign account reporting errors trigger penalties, making accuracy essential.

Catch up on unfiled returns before the year closes

Falling behind on filings can complicate your year-end tax planning, but the IRS offers clear pathways for taxpayers who need to get back on track. These streamlined options are designed to help you correct past omissions while minimizing penalties and restoring full compliance.

If you need to catch up on unfiled returns, first find out if you need to use:

• Streamlined Foreign Offshore Procedure (SFOP): For expats living abroad who have not filed but meet non-willful criteria and foreign residency rules.
• Streamlined Domestic Offshore Procedure (SDOP): For US residents who need to report foreign entities and income while certifying non-willful conduct.

Both programs help taxpayers regain compliance without harsh penalties. The TFX streamlined filing service guides clients back to full IRS compliance.

Investment and crypto review

Even if your income is excluded under FEIE or offset by FTC, capital gains often remain taxable in the US.

Tax-loss harvesting

Before December 31:

• Realize losses to offset capital gains
• Deduct up to $3,000 against ordinary income if net losses exceed gains
• Avoid the wash-sale rule (within 30 days)

Crypto and digital assets

Digital assets are treated as property, and selling, swapping, or using them for payments can create taxable income. Strong records and digital currency reporting keep filing clean.

Year-end tasks:

• Download full trading histories
• Track cost basis, lot IDs
• Convert FMV to USD on transaction dates

Foreign mutual funds and PFICs

Review all foreign investment accounts for PFIC (Passive Foreign Investment Company) exposure – one of the most common (and costly) filing issues for expats.

PFIC reporting requirements include far more than mutual funds. For US tax purposes, common examples are foreign mutual funds and ETFs, investment-linked insurance products, and, often, pooled foreign retirement schemes (e.g., Australian superannuation) that hold PFIC-type investments.

Year-end actions:

• Identify any foreign pooled investments in your accounts.
• Gather year-end statements early – foreign institutions rarely flag PFICs.
• Ask your tax preparer which election (QEF, mark-to-market, or default) is best for your situation.

Catching PFICs at year-end helps avoid filing surprises and prevents unnecessary tax costs next season.

Business and self-employment planning

Self-employed expats

• Consider deferring or accelerating invoices if you’re a cash-basis taxpayer
• Prepay eligible business expenses (software, insurance, courses, etc.)
• Coordinate your self-employment planning with your FEIE/FTC approach

“For Solo 401(k) and SEP IRA plans, the contribution limit isn’t automatically 25% of income or $70,000 for everyone – sole proprietors must use a 20% calculation.” – David Linh

CFC owners

If you own a foreign corporation, year-end is a key checkpoint. Review retained earnings, foreign taxes paid, timing of those payments, and Form 5471 requirements.

“If your foreign company pays a high effective foreign tax, a high-tax exception election may reduce or eliminate GILTI – but it requires detailed testing and consistency.” – David Linh, EA.

Year-end actions for CFC owners

• Complete high-tax exception testing before E&P closes
• Evaluate whether foreign taxes were paid in the same US tax year
• Consider whether a year-end dividend from previously taxed earnings helps clean up E&P
• Model how your current-year results will affect next year’s GILTI exposure
• Determine whether a Section 962 election should be evaluated before December 31

Domestic items

Mortgage interest & charitable giving: These items matter mainly if you still maintain US property or make large US charitable gifts. Most expats use the standard deduction, but itemizing may still make sense if mortgage interest or US charitable donations are substantial.

Energy efficiency credit & residential clean energy credit: Energy efficiency and residential clean-energy credits generally apply only to US residences, not foreign property. If you upgraded a US home – insulation, windows, heat pumps, solar, or battery storage – ensure installation is complete by December 31 and keep all documentation.

Child tax credit: This credit lowers your tax if you have a qualifying child. Check that your income fits the rules and make year-end moves.

State residency: Important if you moved abroad in 2025 or returned to the US. If you live in the US, state tax planning often drives as much savings as federal.

Gifts & estate planning

For 2025:

• Annual gift exclusion: $19,000 per recipient
• Lifetime exemption: $13.99 million

For expats and US-based taxpayers alike:

• Review beneficiary designations
• Coordinate the US and foreign wills
• Understand cross-border probate and tax implications

Ready to make your year-end tax plan count?

As 2025 comes to a close, the right year-end steps can help you reduce tax exposure, avoid surprises, and enter 2026 with confidence. Whether you’re abroad or in the US, a review now – of FEIE/FTC choices, foreign tax timing, retirement contributions, and compliance requirements – can make a meaningful difference in your final tax bill.

If you're unsure which steps apply to your situation, Taxes for Expats is here to help. A free discovery call with us gives you a simple way to ask questions and understand what your next steps may be.

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