What US Expats Need to Know About Filing Their 2025 Tax Returns
Key changes from the One Big Beautiful Bill Act and inflation adjustments you can't afford to miss
Tax season is here, with the April 15th, 2026 deadline approaching fast. The One Big Beautiful Bill Act introduced several significant provisions alongside standard IRS inflation adjustments that could meaningfully reduce your 2025 tax liability. Whether you're claiming the Foreign Earned Income Exclusion or navigating new deductions, understanding these changes now will help you maximize your tax benefits.
Foreign Earned Income Exclusion Increases to $130,000
The maximum Foreign Earned Income Exclusion has increased from $126,500 in 2024 to $130,000 for 2025. This means you can exclude an additional $3,500 of foreign-earned income from US taxation, provided you meet either the Physical Presence Test or Bona Fide Residence Test. If you're living abroad and working remotely, this increase may eliminate your US tax liability entirely or significantly reduce taxable income.
Standard Deduction and Child Tax Credit Adjustments
The standard deduction received a substantial boost for 2025, with married couples filing jointly seeing their deduction increase to over $30,000, up from approximately $26,000 in 2024. The Child Tax Credit also increased from $2,000 to $2,200 per qualifying child, with the refundable portion rising to $1,700. Even if you have no US tax liability after claiming the FEIE, you may still receive up to $1,700 per qualifying child as a refund.
New Senior Standard Deduction
Taxpayers age 65 and older can now claim an additional standard deduction of $6,000 for single filers or $12,000 for married couples filing jointly. This benefit comes on top of the regular standard deduction, though phase-outs apply at higher income levels. For retired expats, this additional deduction could substantially reduce taxable income when combined with the Foreign Earned Income Exclusion.
SALT Cap Raised to $40,000
The State and Local Tax deduction cap increased from $10,000 to $40,000 for 2025. While this primarily benefits taxpayers in high-tax states, it's relevant for expats who maintain property in the US or have state tax obligations despite living abroad. That additional $30,000 of deductible state taxes could make a significant difference in your overall tax picture.
New Car Interest Deduction
Taxpayers can now deduct up to $10,000 of interest paid on passenger vehicle loans. What makes this valuable is that it's not an itemized deduction - you can claim it even if you take the standard deduction. If you financed a vehicle for use during extended US stays or maintain a vehicle stateside, provide your tax preparer with loan interest documentation. Phase-outs begin at $100,000 to $150,000 of income.
No Tax on Tips Up to $25,000
The "no tax on tips" provision allows workers to exclude up to $25,000 of tip income from taxation. The key requirement is that payments must be clearly designated and paid as tips, not regular compensation. If you're a self-employed consultant or freelancer, ensure any gratuities are processed through a tip function on payment platforms like Stripe or PayPal rather than as invoice line items.
For expats already utilizing the Foreign Earned Income Exclusion, this tip exclusion could stack on top of the FEIE, potentially excluding $155,000 of income from taxation. Income-based phase-outs apply.
Don't Leave Money on the Table
The combination of inflation adjustments and new legislative provisions creates meaningful opportunities for tax savings on your 2025 return. Between the increased Foreign Earned Income Exclusion, enhanced standard deduction, new senior deduction, expanded SALT cap, vehicle interest deduction, and tip exclusion, many expats will see significantly reduced US tax liability compared to prior years.
Make sure you have complete records of foreign earned income, any tips received through documented channels, vehicle loan interest statements, state tax payments if applicable, and documentation supporting your Foreign Earned Income Exclusion qualification. The interaction between these provisions requires careful calculation to ensure you're claiming every benefit available.
If you have questions about how these changes impact your specific situation, or if you need assistance ensuring your 2025 tax return takes full advantage of available benefits, reach out to us at mcgowintax.com. Our team specializes in helping Americans living abroad navigate US tax compliance while minimizing their tax burden.