Taxation as a US person living abroad

 involves special considerations for individual taxpayers. If you are a US citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to US income tax, regardless of where you reside.

Among the tax issues confronting you are additional reporting requirements for foreign bank and investment accounts, along with a number of applicable exclusions, deductions, and tax credits. If you have a non-citizen spouse you face potential limitations on inheritance and gifting. If you renounce or relinquish citizenship, or abandon permanent residency, you may face additional special taxes.

US person
For US tax purposes, US citizens and permanent residents (green card holders) living outside the US face the same filing requirements as US residents. Collectively, these are all 'US persons'.

If you hold a green card, you must formally surrender your status to free yourself from US tax filing requirements as a resident alien. The most common way to do this is to file Form I-407 with USCIS, and then filing Form 8854, "Initial and Annual Expatriation Statement." with the IRS. See "Expatriation tax" below for further details.


 * Warning: If you are a green card holder, even living outside the US long enough that the card expires or that US immigration authorities consider it no longer valid for immigration does not change your tax and filing status for the IRS.

Expatriate
The IRS code defines "expatriate" as someone who has given up US citizenship or Permanent Resident (green card) status. Take care not to confuse this with the more normal English meaning of the term "expatriate," which refers to a citizen of one country residing in another country, and is generally shortened to "expat."

For clarity, this article uses the terms "expatriate" and "expatriation" only in the specific IRS sense. It avoids the term "expat" and uses "US person living outside the US" or "US person living abroad" to mean US citizens and green card holders living in countries other than the US.

Form 1040
If you are a US person living outside the US, you must still file tax returns with the IRS. You receive an automatic two month extension to the filing deadline.

Report of foreign bank and financial accounts (FBAR)
If the aggregate contents of all your financial accounts located outside the US exceeds $10,000 at any point in the year, you must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) (formerly Form TD F 90-22.1) by April 15 of the following year, with automatic extension to October 15 for all filers. This form goes to the Treasury Department, but not to the IRS -- it goes to a different branch of the Treasury. As of 2013, you must file this form electronically; no other options are available. The BSA E-Filing System site handles electronic filing.


 * Warning: For FinCEN Form 114 you must report not only accounts belonging to yourself but also any accounts over which you have signature authority, such as company or other organizational accounts.

Statement of specified foreign financial assets (FATCA)
Form 8938, Statement of Specified Foreign Financial Assets (often referred to as the FATCA form), is similar to the FBAR, and reports almost the same information, but you file this form with the IRS along with your tax return.

The Form 8938 filing requirement does not replace or otherwise affect your obligation to file FinCEN Form 114 (FBAR, above). You have to file each form for which you meet the relevant reporting threshold. A comprehensive FAQ detailing requirements for each form can be found at the IRS: Comparison of Form 8938 and FBAR Requirements.

Foreign Earned Income Exclusion (FEIE)
The IRS sums up the Foreign Earned Income Exclusion (FEIE):

You use Form 2555, Foreign Earned Income to figure your FEIE.

The FEIE only applies to earned income (wages and salary), not to passive income (rent, interest, dividends, capital gains). Where the work was performed determines where the income is deemed to have been earned, NOT where the money comes from. For example, if you live and work abroad and are paid by a US employer, it is foreign earned income (with exceptions for some government employees). If you live abroad and work for a foreign employer, and they send you to the US on business, the US considers all wages earned while physically in the US as US-source income. Also, income earned in international airspace, international waters, Antarctica, and even outer space, are all treated as US-source income.

Tax treaties may have the effect of returning the right of first taxation to a foreign government even for work performed in the US. You may need to use a foreign tax credit for this case. For example, if you are a full-time resident of Japan, and your Japanese employer sends you to the US on a business trip, the US-Japan tax treaty specifies that the income you earned while in the US is to be treated as though you earned it in Japan. You cannot, however, exclude this income from US taxation using the FEIE. Instead, you need to pay whatever Japanese taxes are due on the income, and then use the Additional Foreign Tax Credit worksheet in the back of Pub. 514 to calculate the foreign tax credit that you can take against the US taxes levied on that same income.

Foreign Tax Credit (FTC)
You can take a Foreign Tax Credit (FTC) for foreign taxes paid on income that is not excluded using the FEIE. In some cases, where the foreign tax rate is high enough to more than cancel any US taxes due, it may be more advantageous to use only the FTC and forgo the FEIE -- for example, to keep you eligible to make IRA contributions.

There are significant limitations on your ability to switch back and forth between using the FTC and the FEIE. Regarding the FEIE, the IRS states:

Foreign housing exclusion or deduction
You can take an exclusion or deduction for certain foreign housing-related expenses, to the extent that they exceed a certain threshold (approx. $15,000/year in 2012). There is a cap on the amount that you can claim that varies by location. You use Form 2555, Foreign Earned Income to figure the exclusion or deduction.

The IRS describes what expenses are eligible:

For further details, see the instructions to Form 2555.

Living in a US territory outside of the USA
US territories and possessions include American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, the US Virgin Islands, and Puerto Rico.

The IRS notes:

Choosing a filing status
If your spouse is a non-resident alien, and you wish to file as Married Filing Jointly, you will need to choose to treat your spouse as a US resident for tax purposes as noted in Publication 54:

Once you make this election, it continues for all subsequent years. If you revoke it, you generally cannot ever choose it again.


 * Warning: Choosing to treat a nonresident alien spouse as a US resident creates US reporting requirements for all of that spouse's income and assets.

Publication 54 also notes:

For further details, see Publications 54 and 501.

Special conditions on spousal inheritance and gift taxes
Nolo provides a short summary of inheritance and gift tax issues with a non-US citizen spouse:

These problems apply not only to US persons abroad, but to any US person who is married to a non-US citizen.

Establishing permanent residency in US
It is possible for the foreign spouse (or other immediate relative) of a US citizen to apply for US permanent residency while still outside the US. According to the US Citizenship and Immigration Services:

For details, see the USCIS "Consular Processing" page.

US Citizens
The two primary ways to lose US citizenship are:
 * Relinquishing US citizenship: If you take the citizenship of another country with the intent of relinquishing US citizenship, you are considered to have "relinquished" US citizenship. You still have to notify your local US embassy in person for the loss to be recognized by the US government, however. On November 9, 2015, the consular processing fee for relinquishment rose from zero to $2,350.
 * Renouncing US citizenship: You can also "renounce" US citizenship, which requires you to take an oath of renunciation at a US embassy or consulate. This costs a $2,350 processing fee as of September 12, 2014, and potentially subjects you to application of the Reed Amendment.

For tax purposes, relinquishment and renunciation are identical, with your tax filing obligation continuing up until the date of the appointment at the embassy or consulate. For other purposes (such as transmitting US citizenship to your children), your effective date of loss of citizenship is the date of the relinquishing act (such as acquiring another citizenship with intent to relinquish US citizenship), or if renouncing, the date you take the renunciation oath at the embassy or consulate.


 * Warning: Even if you take another citizenship intending to relinquish, if you then travel on your US passport, vote in a US election, or do anything else that indicates that you still consider yourself a US citizen after the presumed expatriating act, you will be deemed not to have relinquished after all, at which point renouncing may become the only recognized way for you to lose US citizenship.

Green card holders
The elective ways to lose a US green card are:
 * Abandoning US permanent residency: This is similar to relinquishing US citizenship. You need to file Form I-407, Abandonment of Lawful Permanent Resident Status.
 * Claiming US tax treaty benefits: A long-term permanent resident claiming treatment as a resident of another country and not waiving tax treaty treatment for that country is deemed to have lost permanent resident status.

The first of these is the cleanest, and by far the most common. Prior to July 1, 2019, you could file Form I-407 with the USCIS field office in the local US embassy. After this date, you have to file this form directly with the USCIS in Vermont, although a rare exception may be possible. The estimated processing time is 60 days, so you need to take this into account in any planning.


 * Warning: If you hold a green card you must formally surrender your status to free yourself from US tax filing requirements as a resident alien. Allowing the physical card to expire so that US immigration authorities consider it no longer valid for immigration does not change your tax and filing status for the IRS.

Tax consequences
In either case of losing citizenship, or in the case of losing permanent residency if you have been a lawful permanent resident of the US in at least eight of the past fifteen years, the tax implications are similar. You need to file IRS Form 8854, Initial and Annual Expatriation Statement, and potentially pay exit taxes based on a deemed disposition of assets and a deemed immediate distribution of all pension and retirement savings.

The cases described above are the most common ones, but there are many special cases and exceptions, and different rules apply for those who lost citizenship or residency in previous years. For details, see Instructions for Form 8854, and the IRS discussion of the expatriation tax.

This is also an area where the laws have changed frequently in recent years, and the tax traps here are numerous and severe, so be very careful if you plan on taking any of the above steps.

401(k) and Roth 401(k) contributions
If you have access to 401(k) or Roth 401(k) plans, it may be worth thinking about what order to make contributions to what kind of plan. For example, it may make sense to make pre-tax contributions to a 401(k) until you no longer have taxable income (with the remainder being untaxed due to application of reductions such as the FEIE, the Standard Deduction, and the Personal Exemption), and make post-tax contributions with any amounts above that.

IRA and Roth IRA contributions
If you use the FEIE, you cannot use any of the excluded income to contribute to an IRA. You can contribute if you have earned income above the FEIE limit, and below the IRA contribution cutoff. You can also contribute using earned income that is not excludable (for example, wages you earn during a business trip to the US, which are considered US-source income even if paid by a non-US employer). In the case of spousal IRAs, your spouse's non-excluded income can be used to found a spousal IRA. Pub 590 is quite clear on this question:
 * 1) Taxable compensation for IRA contribution purposes does not include income excluded under the FEIE or housing exclusions, but if one spouse has taxable compensation in excess of this exclusion, the excess income can fund an IRA contribution.
 * 2) A spousal contribution can be made for the lower earning spouse using income from the higher earner. The spouse whose taxable compensation exceeds the FEIE can therefore provide this excess taxable comp for the other lower earning spouse. In other words, the excess taxable comp of the higher earning spouse does not have to be applied to the remaining FEIE of the lower earning spouse.

You do not have to use the FEIE, but if you do use the FEIE, you have to use all of it, and exclude all income that is excludable up to the exclusion limit. It is NOT possible to partially exclude eligible earned income and leave some un-excluded for IRA contributions.

Investing locally (from outside the US)
If you invest where you live, you need to be aware of several issues and hindrances caused by US tax rules.

Passive foreign investment company (PFIC)
Mutual funds, exchange-traded funds (ETFs), real estate investment trusts (REITs) and other collective investment vehicles, if they are not registered with the US Securities Exchange Commission (SEC), are classified under US tax law as Passive Foreign Investment Companies, or PFICs. The taxation on these under US law is extremely unfavorable, and requires you to file Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund with your tax return, which can be an extremely time consuming task.

In general, to avoid you having to deal with PFIC issues means you can invest only through SEC-registered investment vehicles (which may in turn incur tax problems with the local tax authorities), or otherwise through individual stocks and bonds.

For a discussion of how to invest using individual stocks, see the Wiki page on passively managing individual stocks.

If you live in the UK, you need to use HMRC 'reporting funds' to avoid the UK's higher tax rates for gains in offshore (to the UK) funds. A selection of US domiciled ETFs are HMRC reporting funds. For more, see the Wiki page on US domiciled ETFs that are UK HMRC reporting funds.

Forms W-9 and W-8BEN
If, as a US person, you open a financial account outside the US that deals with US securities (brokerage dealing in US stocks and ETFs, for example), you account provider should give you a Form W-9 to fill out. This form identifies owners of US securities who are US persons, and tells your brokerage NOT to withhold US taxes from US-source distributions, since you will declare them on your US tax return separately.

If you are a US person, you should NOT fill out a Form W-8BEN. This form is for non-resident aliens, and will typically result in US taxes being automatically withheld on distributions. (If you do find yourself subject automatic withholding for some reason, this does not relieve you of the requirement to report the distributions on your US taxes, it just makes the job more complicated.)

US-based brokerages
Because of FATCA, most non-US brokerages (and many US based ones) now refuse access to US persons living outside the US. However, Interactive Brokers welcome this client group.

Several major US brokerages do not allow investors to open accounts from outside the US. Vanguard is one example. Another example is Schwab, which no longer offers accounts to residents of Japan.

EU and UK residents and PRIIPs
In 2018, the European PRIIPs (Packaged Retail and Insurance-based Investment Products) regulation became effective. As a result it is now difficult or even impossible for EU residents to purchase US domiciled funds directly (although indirect purchases potentially remain possible ). Shares purchased before the regulation came into effect can be kept and sold, but EU residents can generally no longer buy new shares of these funds or ETFs.

The UK left the EU in January 2020, but created its own 'UK PRIIPs' regime that is fully aligned with the EU PRIIPs, so PRIIPs restrictions continue to apply in the UK.

Cross-border taxation
In general, other countries do not recognize the tax-advantaged status of US accounts such as IRAs, 401(k)s, Coverdell ESAs, and 529 plans. And symmetrically, the US generally does not recognize other countries' tax-advantaged accounts either.

There are some limited exceptions, depending on tax treaty. For example, the US-Canada tax treaty provides for cross-recognition of some (but not all) tax advantaged accounts in either country, as does the US-UK treaty. But the US-Japan treaty, for example, has no such provisions, so Japan will treat a Roth IRA as just another taxable account, and the US will do the same with a NISA (Japan's equivalent to a Roth IRA).

Canadian tax advantaged accounts
Canadian registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) held by US citizens can receive tax exempt status, although under some circumstances they may need to be reported annually using Form 8891, U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans.

Registered education savings plans (RESPs) and Tax-Free Savings Accounts (TFSAs) cannot receive tax exempt status and may be subject to additional tax filings.

US Department of the Treasury

 * FinCEN Form 114, Report of Foreign Bank and Financial Accounts, from the U.S. Financial Crimes Enforcement Network
 * BSA E-Filing System, from the U.S. Department of the Treasury

IRS guidelines

 * U.S. Citizens and Resident Aliens Abroad
 * Foreign-Earned Income Exclusion
 * Foreign Tax Credit
 * Tax Treaties
 * Individuals Living or Working in U.S Possessions
 * Non-Resident Alien Spouse
 * Expatriation Tax
 * Foreign Account Tax Compliance Act (FATCA)

IRS publications and forms

 * Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad
 * Publication 519, U.S. Tax Guide for Aliens
 * IRS Form 2555, Foreign Earned Income
 * Publication 514, Foreign Tax Credit for Individuals
 * Form 8938, Statement of Specified Foreign Financial Assets
 * Publication 570, Tax Guide for Individuals With Income From U.S. Possessions
 * Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund
 * Disclosure, Privacy Act, and Paperwork Reduction Act Notice for Form 8621
 * IRS Form 8854, Initial and Annual Expatriation Statement