The myth: "I live abroad now, so I don't file US taxes"
This is the single most common — and most expensive — misunderstanding among Americans in Mexico and Spain. US citizens and green-card holders are taxed on their worldwide income no matter where they live. Moving abroad doesn't end your filing obligation; it just changes which forms you file.
What the Foreign Earned Income Exclusion actually does
The Foreign Earned Income Exclusion (FEIE), claimed on Form 2555, lets you exclude up to $132,900 of foreign earned income for 2026 (up from $130,000 in 2025) from US income tax. If both spouses have foreign earned income and each qualifies, each files their own Form 2555 — up to $265,800 combined.
You qualify only if your tax home is abroad and you pass one of two tests:
| Test | What it requires |
|---|---|
| Physical Presence | 330 full days in a foreign country during any 12 consecutive months |
| Bona Fide Residence | A bona fide resident of a foreign country for an uninterrupted period that includes a full tax year |
The big one: it does NOT erase self-employment tax
Here's what surprises freelancers, contractors and business owners. The FEIE reduces your income tax — but it does not reduce your US self-employment tax. That's 15.3% (12.4% Social Security up to the $184,500 wage base, plus 2.9% Medicare) on 92.35% of your net earnings.
Mexico vs. Spain: the difference that decides it
Whether you actually owe that self-employment tax turns on one thing: a totalization agreement. These treaties stop you paying into two countries' social security systems at once.
- Spain: the US–Spain totalization agreement is in force (since 1988). If you're covered by Spanish social security, a certificate of coverage exempts you from US Social Security / self-employment tax.
- Mexico: there is no agreement in force. One was signed in 2004 but never took effect — so a self-employed American in Mexico still owes US self-employment tax.
About 30 countries have agreements in force (most of the EU, Canada, Chile) — but Mexico is a notable exception, which is exactly why so many Americans there get a surprise bill.
What about income above the cap?
The FEIE only excludes up to $132,900. Earn more and the excess stays taxable at your ordinary US rates, computed with the Foreign Earned Income Tax Worksheet (the "stacking rule" — your excluded income still pushes the leftover into higher brackets). The foreign housing exclusion and the Foreign Tax Credit (Form 1116) are separate options — and you can't apply the FEIE and the FTC to the same dollars.