U.S. citizens and green card holders in Iran must file a U.S. tax return on their worldwide income. Because there is no tax treaty, double taxation is primarily managed through the Foreign Earned Income Exclusion (FEIE) and an itemized deduction for taxes paid to Iran, as tax credits are disallowed.
US filing basics every American abroad must know
US citizens and green-card holders are taxed on worldwide income wherever they live, and usually must file Form 1040 once gross income exceeds the IRS threshold ($15,750 for single filers, $31,500 for married filing jointly, and $23,625 for head of household for 2025), even when no tax is ultimately due. The tools that prevent double taxation are the Foreign Earned Income Exclusion (FEIE, up to $130,000 for 2025 under IRC §911) and the Foreign Tax Credit.
Two reporting rules catch most filers in Iran: the FBAR (FinCEN Form 114), required when foreign financial accounts exceed $10,000 in aggregate at any point in the year, and Form 8938 (FATCA) for specified foreign assets above the applicable threshold. Both can carry penalties even when no tax is owed. If you are behind, the Streamlined Filing Compliance Procedures are the usual penalty-free path back for non-willful taxpayers.
US tax treaty with Iran
The United States and Iran do not have an income tax treaty. Consequently, there are no treaty provisions to reduce withholding rates or reallocate taxing rights. U.S. taxpayers in Iran must rely on domestic U.S. tax rules for relief from double taxation, specifically the Foreign Earned Income Exclusion and a deduction for foreign income taxes paid, not a credit.
Iranian Retirement Plans and U.S. Tax
The U.S. does not recognize Iranian retirement or savings plans as qualified for tax purposes. This means contributions are generally not deductible on a U.S. return, and the plan's internal earnings and growth may be taxable in the U.S. each year. These accounts are often treated as foreign trusts, which can trigger reporting on Forms 3520 and 3520-A, or may hold Passive Foreign Investment Companies (PFICs), requiring Form 8621. Balances in these plans must be included when determining FBAR and Form 8938 filing requirements.
Investments, property, and capital gains in Iran
Investments in Iranian pooled funds, like mutual funds, are highly likely to be considered Passive Foreign Investment Companies (PFICs) under U.S. law. Owning PFICs requires filing Form 8621 and can result in complex and unfavorable tax outcomes. For U.S. persons who own more than 50% of an Iranian corporation, such as a Private Joint Stock Company or Limited Liability Company, it becomes a Controlled Foreign Corporation (CFC). This status requires filing Form 5471 and may lead to current U.S. taxation of the company's profits under GILTI or Subpart F rules, even if those profits are not distributed. Capital gains from any source are considered passive income, are not eligible for the FEIE, and are fully taxable in the U.S.
Self-employment and companies in Iran
A critical point for self-employed U.S. persons in Iran is the lack of a U.S.-Iran totalization agreement. This means they are fully liable for U.S. self-employment taxes (Social Security and Medicare) on net earnings of $400 or more. The tax rate is 15.3% on the applicable earnings base. The Foreign Earned Income Exclusion cannot be used to reduce self-employment income for this tax calculation. There is no Certificate of Coverage available to claim an exemption, so individuals may be subject to social security contributions in both countries.
Worked examples
Salaried employee on a local contract (2025)
An engineer earns a salary of $150,000. Using the Foreign Earned Income Exclusion (FEIE), they can exclude up to $130,000 of this income from U.S. income tax on Form 2555. The remaining $20,000 is subject to U.S. income tax at their marginal rate. Due to sanctions, they cannot claim a foreign tax credit for Iranian taxes paid. Instead, they may take an itemized deduction for the Iranian taxes attributable to that $20,000 of income on Schedule A.
Self-employed consultant (2025)
A consultant earns $100,000 in net self-employment income. They can use the FEIE to exclude the full $100,000 from U.S. income tax. However, the FEIE does not affect self-employment tax. Because there is no totalization agreement with Iran, they owe the full U.S. self-employment tax of $14,130 (calculated as $100,000 x 92.35% x 15.3%). This tax must be paid regardless of any social security contributions made in Iran.
Investor with passive income (2025)
A U.S. citizen in Iran receives $30,000 in capital gains and dividends from local investments. This is passive income and is not eligible for the Foreign Earned Income Exclusion. The entire $30,000 is subject to U.S. income and capital gains tax. Any Iranian tax paid on this income can be claimed as an itemized deduction on Schedule A, but it cannot be claimed as a dollar-for-dollar foreign tax credit.
Common mistakes for Americans in Iran
- Attempting to claim a Foreign Tax Credit for taxes paid to Iran, which is disallowed; only a deduction is permitted.
- Believing the Foreign Earned Income Exclusion (FEIE) eliminates the need to pay U.S. self-employment tax.
- Assuming a non-existent U.S.-Iran totalization agreement provides an exemption from U.S. Social Security and Medicare taxes.
- Failing to report Iranian bank and financial accounts on the FBAR (FinCEN Form 114) if the aggregate balance exceeds $10,000.
- Overlooking Form 8938 reporting for specified foreign financial assets, which has different thresholds and requirements than the FBAR.
- Not realizing that local Iranian mutual funds or other pooled investments are likely Passive Foreign Investment Companies (PFICs) requiring Form 8621.
- Assuming that an Iranian retirement plan receives the same tax-deferred treatment in the U.S. as a 401(k) or IRA.
- Failing to file Form 5471 when owning a significant share of an Iranian company, potentially missing a Controlled Foreign Corporation (CFC) filing obligation.
Iran tax FAQ
Is there a U.S.-Iran tax treaty?
No. There is no income tax treaty between the United States and Iran. This means there are no treaty benefits like reduced withholding rates. Double tax relief for U.S. citizens is limited to the provisions of the U.S. Internal Revenue Code, such as the Foreign Earned Income Exclusion and a deduction for foreign taxes paid.
Can I claim the Foreign Tax Credit for taxes paid to Iran?
No. U.S. sanctions prohibit claiming a Foreign Tax Credit (FTC) for income taxes paid or accrued to Iran. Instead, you may claim these taxes as an itemized deduction on Schedule A of Form 1040. A deduction reduces your taxable income, which is less beneficial than a credit that reduces your tax liability dollar-for-dollar.
Do I owe U.S. Social Security tax if I'm self-employed in Iran?
Yes. There is no totalization agreement between the U.S. and Iran to coordinate social security coverage. A self-employed U.S. person in Iran with net earnings of $400 or more must pay U.S. self-employment tax (Social Security and Medicare). This is true even if your income is fully excluded from U.S. income tax by the FEIE and even if you also pay into Iran's social security system.
Does the Foreign Earned Income Exclusion cover my investment income?
No. The Foreign Earned Income Exclusion (FEIE) can only be used to exclude foreign earned income, such as salary and self-employment income. It cannot be used to exclude passive or unearned income, such as interest, dividends, capital gains, rents, or royalties. This income remains fully taxable in the U.S.
What is an FBAR and do I need to file one for my Iranian accounts?
The FBAR (Report of Foreign Bank and Financial Accounts, or FinCEN Form 114) is a report filed with the U.S. Treasury's Financial Crimes Enforcement Network. You must file an FBAR if you have a financial interest in or signature authority over foreign financial accounts, including those in Iran, and the aggregate value of those accounts exceeds $10,000 at any point during the year.
What is a PFIC and how does it affect my investments in Iran?
A Passive Foreign Investment Company (PFIC) is a foreign corporation that has primarily passive income or assets. Most foreign mutual funds and many other pooled investments are considered PFICs. If you own shares in an Iranian PFIC, you must file Form 8621. The default tax rules for PFICs are very punitive, so this is a significant compliance issue for U.S. investors abroad.
What happens if I own a business in Iran?
If you have more than 50% ownership in an Iranian company (or if U.S. shareholders in total own more than 50% and you own at least 10%), it is likely a Controlled Foreign Corporation (CFC). Owning a CFC triggers a requirement to file Form 5471, which is a complex information return. Furthermore, under GILTI and Subpart F rules, you may have to pay U.S. tax on the company's profits currently, even if you do not receive a distribution.
Why is the Foreign Tax Credit disallowed for Iran?
The disallowance of the Foreign Tax Credit for taxes paid to Iran is a result of U.S. law. The Internal Revenue Code, specifically Section 901(j), denies the credit for taxes paid to countries with which the U.S. has severed diplomatic relations or which are designated as supporting international terrorism. Taxpayers may only take an itemized deduction for these taxes.
Sources and last reviewed
- IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad (verified 2026-06-07)
- IRS Publication 514, Foreign Tax Credit for Individuals (verified 2026-06-07)
- IRS Page - Report of Foreign Bank and Financial Accounts (FBAR) (verified 2026-06-07)
- Iran Ministry of Economic Affairs and Finance (verified 2026-06-07)
Last reviewed .
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