U.S. taxes for veterans living abroad: what is taxable and what is not

September 4, 2026MoneyGlobalBy the OCONUS Veterans team

Moving overseas changes a lot of things: your phone plan, your bank, your grocery list. It does not change one thing. As a U.S. citizen, you still file a U.S. federal tax return, and you are taxed on your worldwide income. The IRS says the filing rules are generally the same whether you live in the United States or abroad.

The good news for most veterans is that a big part of what we receive is not taxable at all, and the parts that are taxable follow rules you can learn in an afternoon. This guide walks through what is taxable, what is not, the deadlines that are different for people living abroad, and the tools that keep you from paying tax twice. It is general information, not tax advice. Your situation (retired pay, a local job, a spouse who is not a U.S. citizen, property back home) can change the answer, so plan to sit down with a qualified tax professional who works with Americans abroad.

The short version: what is taxable and what is not

Here is how the most common veteran income streams are treated on your federal return, based on IRS Publication 525 (2025 edition) and the IRS pages on foreign earned income.

VA disability is tax free, even overseas

IRS Publication 525 is blunt about this. It says not to include in your income any veterans' benefits paid under any law, regulation or administrative practice administered by VA. The list of nontaxable amounts includes disability compensation and pension payments for disabilities paid to veterans or their families, education and training allowances, grants for homes designed for wheelchair living, and grants for vehicles for veterans who lost their sight or the use of their limbs.

Living abroad does not change that federal treatment. Whether your new country taxes VA compensation under its own law is a separate question, and we cover it in our post on tax treaties and VA disability.

One practical point: if VA compensation is your only income, you may not even have a federal filing requirement. Filing thresholds are based on gross income, and nontaxable VA benefits are not part of gross income. Check the current Form 1040 instructions for the thresholds for your filing status and age, because they change each year.

Military retired pay is taxable, wherever you live

If your retirement pay is based on age or length of service, the IRS says it is taxable and is reported as a pension on Form 1040. You receive a Form 1099-R for it each year. Retired pay is not "foreign earned income," because it is a pension, not pay for work you do abroad. That means the foreign earned income exclusion cannot shelter it.

A few rules can lower the taxable amount:

• Survivor Benefit Plan premiums. Publication 525 says the reduction in retired pay that funds an SBP or RSFPP annuity for your spouse or children is not included in your income.
• CRSC. If you receive Combat-Related Special Compensation, you may exclude it from income. Other portions of your retired pay may still be taxable.
• Retroactive VA rating. If you retired on years of service and VA later grants a retroactive service-connected rating, the IRS says your retired pay for the retroactive period is excluded from income up to the amount of VA disability benefits you would have been entitled to. You claim the refund on Form 1040-X for each prior year, with a copy of the VA determination letter, subject to the statute of limitations.

If you get a rating increase while living abroad, talk to your tax preparer about that last point. It is money people leave on the table. Keep every VA award letter with your tax records so your preparer can see the effective dates.

The foreign earned income exclusion: helpful, but only for work income

Plenty of veterans work after they move: teaching English, consulting, working for a local company, or running a small business. That income is taxable in the U.S., but you may be able to exclude a large chunk of it with the foreign earned income exclusion (FEIE) on Form 2555.

According to the IRS, the maximum exclusion is $130,000 per qualifying person for tax year 2025 (the return most people file in 2026) and $132,900 per person for tax year 2026. If both spouses work abroad and each qualifies, each can claim the exclusion. The IRS also allows a foreign housing exclusion or deduction; for tax year 2026 the housing expense limit for most locations is $39,870 if your qualifying period covers the whole year.

To qualify, the IRS says you need foreign earned income, a tax home in a foreign country, and you must meet one of these tests:

• Bona fide residence test: you are a U.S. citizen who is a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year.
• Physical presence test: you are physically present in a foreign country for at least 330 full days during any period of 12 consecutive months.

What the FEIE does not cover matters just as much for our community:

• The IRS says foreign earned income does not include pension or annuity payments, including Social Security benefits. So military retired pay, a federal civil service annuity and Social Security are out.
• Income from working abroad as an employee of the U.S. government does not qualify. If you work as a DoD civilian on a base in Japan or Korea, your pay is not excludable. Pay from a private contractor is a different case, and worth asking your preparer about.
• Investment income (interest, dividends, capital gains) is not earned income.

The foreign tax credit: the other way to avoid double tax

If your new country taxes some of your income, you can usually claim a credit against your U.S. tax for the foreign income tax you actually owe, using Form 1116. IRS Publication 54 notes that the credit is for your legal and actual foreign tax liability, which is not necessarily the amount withheld, and you cannot take a credit for foreign tax that would be refunded if you asked for it.

The FEIE and the foreign tax credit interact. You cannot take a credit for foreign tax on income you excluded. For some people, especially in higher-tax countries in Europe, the credit works better than the exclusion. That is a calculation to run with a professional, not a guess.

Deadlines are different when you live abroad

This is where many people get tripped up, in both directions. The IRS rules for citizens living abroad on the regular due date of the return:

• April 15 is still the regular due date for a calendar-year return, and interest runs on any tax not paid by then.
• June 15 is your automatic filing extension if you live outside the U.S. and Puerto Rico and your main place of business or post of duty is outside them, or you are in the military on duty outside the U.S. You do not have to request it, but Publication 54 says you must attach a statement to your return explaining which situation qualifies you.
• October 15 is available if you file Form 4868 by June 15. This extends the time to file, not the time to pay.
• Form 2350 is a special extension for people who need more time to meet the bona fide residence or physical presence test before claiming the FEIE.

If a due date falls on a weekend or legal holiday, it moves to the next business day.

Step by step: your first tax season abroad

1. List every income stream. VA compensation, retired pay, Social Security, any job or business, rental income from a house back home, interest and dividends. Mark which are taxable using the table above.
2. Collect U.S. tax documents. The 1099-R for your retired pay, the SSA-1099 for Social Security, and any 1099s from U.S. banks and brokerages. Make sure these organizations have a current mailing or email address for you.
3. Collect foreign records. Local pay slips, local tax returns or assessments, and year-end statements from any foreign bank or investment account.
4. Count your days. Keep a simple travel log with dates in and out of each country. You will need it for the physical presence test and possibly for your state and your new country.
5. Check your foreign account reporting. If your foreign accounts added up to more than $10,000 at any time during the year, you probably need to file an FBAR, which is separate from your tax return. See our guide to FBAR and FATCA for veterans.
6. Decide on FEIE versus foreign tax credit with your preparer, if you have foreign earned income or pay foreign tax.
7. Look at your state. Some states keep taxing you after you move abroad if you never cut ties. Read our post on ending state tax residency.
8. File by the right date, attaching the June 15 statement if you use the automatic extension, and pay by April 15 to avoid interest.

Common mistakes to avoid

Thinking you do not need to file because you live abroad

Your filing requirement follows your citizenship and your income, not your address. If your taxable income (retired pay, wages, investments) is above the filing threshold, you file. The IRS notes that benefits like the FEIE and the foreign tax credit require filing a return to claim them.

Trying to use the FEIE on retired pay

It does not work, and claiming it can lead to a bill with interest later. Retired pay is a pension.

Forgetting estimated taxes

If not enough is being withheld from your retired pay, or you have self-employment income abroad, you may owe estimated tax payments during the year. Check with DFAS about adjusting the federal withholding on your retired pay so you are not caught short.

Ignoring self-employment tax

Publication 54 says that if your net earnings from self-employment are $400 or more, you must file. The FEIE does not remove self-employment tax. The U.S. has Social Security (totalization) agreements with some countries that can keep you from paying into two systems at once; ask your preparer whether one applies.

Forgetting the extra forms

Besides the FBAR and Form 8938, the IRS lists other forms that can apply to people abroad, such as Form 3520 if you receive more than $100,000 in gifts or bequests from a nonresident alien individual or foreign estate. Penalties for missing these forms can be steep even when no tax is owed.

Where to get help

Start with the IRS page for U.S. citizens and resident aliens abroad and Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. For military-specific rules, see Publication 525 and Publication 3, the Armed Forces' Tax Guide.

Then find a qualified tax professional (a CPA, an enrolled agent or a tax attorney) who regularly prepares returns for Americans abroad. Ask up front whether they handle military retired pay, VA compensation, Form 2555, Form 1116 and FBARs. A good preparer pays for themselves in the first year.

For the bigger picture on money, voting and paperwork while you live overseas, see our taxes and voting abroad hub.

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Published September 4, 2026. Information only, not legal, tax, immigration or medical advice. Confirm with the official sources.