What You Need to Know About Cross-Border Taxes When Moving Abroad as a U.S. Citizen

Ricky Shoker
Feb 14
5 min read

Moving abroad as a U.S. citizen or green card holder presents exciting opportunities, but it also brings complex tax obligations. The United States is one of the few countries that taxes based on citizenship rather than residency, meaning that even after relocating, U.S. citizens must continue filing U.S. tax returns. Additionally, depending on the destination country, there may be

overlapping tax obligations. This guide explores cross-border tax issues to help U.S. individuals understand their financial responsibilities when living overseas.

U.S. Citizenship-Based Taxation: Key Considerations

The U.S. operates on a citizenship-based taxation system, meaning that all U.S. citizens and green card holders must report their worldwide income to the IRS, regardless of where they reside. This includes salary, investment income, rental property earnings, and business profits.

Key U.S. Tax Filing Obligations for Expats

IRS Form 1040: Must be filed annually, reporting all global income.
Foreign Earned Income Exclusion (FEIE): Allows expats to exclude up to $126,500 (2024 limit) of foreign-earned income if they meet certain residency requirements.
Foreign Tax Credit (FTC): Helps offset U.S. taxes paid on income that is also taxed abroad.
Self-Employment Taxes: U.S. citizens abroad still owe U.S. Social Security and Medicare taxes unless covered under a Totalization Agreement with their new country of residence.

Failing to file can result in significant penalties, making compliance essential.

Foreign Tax Residency Rules and Their Impact

Each country has its own rules for determining tax residency, typically based on physical presence and residential ties. Many countries consider an individual a tax resident if they spend 183 days or more in a calendar year within their borders.

Once a U.S. citizen becomes a tax resident in another country, they may need to file tax returns and report their worldwide income there as well.

Key considerations:

Some countries tax residents on worldwide income, while others only tax income earned within their borders.
Tax treaties may provide relief from double taxation.
Foreign capital gains tax rates may differ significantly from U.S. capital gains rules.

Understanding the tax system of the destination country is crucial to avoid unexpected tax liabilities.

U.S. Tax Treaties: Avoiding Double Taxation

The U.S. has tax treaties with many countries to prevent double taxation and clarify tax obligations for expatriates.

Key treaty provisions:

Foreign Tax Credit (FTC): Allows U.S. citizens abroad to claim a credit for taxes paid to their country of residence, reducing their U.S. tax liability.
Foreign Earned Income Exclusion (FEIE): Helps shield a portion of foreign-earned income from U.S. taxation.
Tie-Breaker Rules: Determine tax residency status in cases where both countries claim tax jurisdiction.

Despite tax treaties, U.S. citizens must still file U.S. tax returns annually.

Reporting Foreign Income and Assets

U.S. citizens abroad must comply with strict foreign asset reporting requirements under FATCA and FBAR.

FBAR (FinCEN Form 114): Must be filed if foreign financial accounts exceed $10,000 at any point in a year.
FATCA (Form 8938): Required if foreign assets exceed reporting thresholds (varies based on filing status).
Foreign Employer Pension Plans: Some foreign retirement accounts may have special reporting requirements.

Failure to report foreign accounts can result in severe penalties.

Taxation of Retirement Accounts

Cross-border taxation of retirement accounts is complex and depends on the tax treaty between the U.S. and the country of residence.

U.S. 401(k) and IRA Abroad:
- Some countries recognize tax deferrals, while others may tax U.S. retirement accounts as foreign investments.
- Withdrawals may be taxable in both the U.S. and the new country of residence, requiring careful tax planning.
Foreign Pension and Savings Accounts:
- Some foreign retirement accounts are treated as taxable under U.S. law.
- IRS reporting may be required on Form 3520 or Form 8621 (for foreign trusts and PFICs).

Tax planning is crucial to avoid unexpected tax liabilities on retirement savings.

Avoiding PFICs When Investing Abroad

One of the biggest tax traps U.S. citizens face when moving abroad is investing in Passive Foreign Investment Companies (PFICs). These include most foreign mutual funds, exchange-traded funds (ETFs), and other pooled investment vehicles.

Why Are PFICs a Problem?

PFICs are subject to punitive U.S. tax treatment, including:

Excessive taxation: Gains may be taxed at the highest marginal U.S. tax rate (up to 37%).
Complex reporting requirements: U.S. taxpayers must file Form 8621 for each PFIC owned.
Interest penalties: If a PFIC is not reported correctly, the IRS may impose interest charges on gains.

How to Avoid PFICs

Stick to U.S.-based investments: Invest in U.S. stocks, bonds, and ETFs held in U.S. brokerage accounts.
Use Individual Stocks Instead of Mutual Funds: Buying direct shares of companies avoids PFIC classification.
Consult a Cross-Border Investment Advisor: A professional can help structure your portfolio in a tax-efficient manner.

Avoiding PFICs is essential for U.S. citizens abroad to minimize tax burdens and reporting headaches.

Business and Self-Employment Taxes

Self-employed U.S. citizens abroad must navigate both U.S. and foreign tax obligations.

U.S. Self-Employment Tax: Unless covered by a Totalization Agreement, expats may owe Social Security and Medicare taxes.
Foreign Business Taxes: Entrepreneurs may be subject to local business taxes and VAT (Value-Added Tax).
Tax Treaty Relief: Some treaties provide exemptions or credits for self-employment income.

Proper tax structuring can help reduce the overall tax burden.

Estate and Gift Tax Implications

U.S. Estate Tax: Applies to worldwide assets of U.S. citizens, even if they reside abroad.
Foreign Inheritance Tax Rules: Some countries impose inheritance taxes that differ from U.S. estate tax laws.
Gift Taxes: The U.S. imposes gift tax reporting requirements, even for assets given to foreign individuals.

Cross-border estate planning ensures efficient wealth transfer and minimizes tax exposure.

Conclusion

Moving abroad as a U.S. citizen brings unique tax challenges. From dual tax filings to investment and retirement planning, proper tax strategy is crucial. The U.S. tax treaty network, Foreign Tax Credits, and careful planning help avoid double taxation and financial pitfalls. Seeking guidance from a cross-border tax specialist ensures compliance and optimizes tax efficiency for a smooth financial transition. Contact Us for a tailored solution that meet your unique needs.

FAQs

1. Do U.S. citizens living abroad need to file U.S. taxes?

Yes, U.S. citizens must file U.S. tax returns, even while residing in another country, due to citizenship-based taxation.

2. How do I avoid double taxation when living abroad?

Using the Foreign Tax Credit (FTC) and the Foreign Earned Income Exclusion (FEIE) helps offset U.S. tax obligations.

3. What are PFICs, and why should I avoid them?

PFICs (Passive Foreign Investment Companies) include most foreign mutual funds and ETFs, which are subject to punitive U.S. tax treatment.

4. Do I owe U.S. estate taxes if I live abroad?

Yes, U.S. estate tax applies to worldwide assets of U.S. citizens, regardless of residency.

5. Should I consult a tax professional for cross-border taxes?

Yes, tax laws are complex, and professional guidance ensures compliance and tax efficiency.