Financial Planning for US Citizens Living Abroad
The United States operates one of the most unusual tax systems in the world: it taxes its citizens and permanent residents (Green Card holders) on their worldwide income, regardless of where they live and regardless of whether they have any connection to the US beyond their citizenship status. This citizenship-based taxation — shared only with Eritrea among major economies — creates a distinct and genuinely complex financial planning environment for the estimated several million US persons living outside the United States.
This guide outlines the key obligations, the most important pitfalls, and the practical planning considerations for US citizens who live and invest outside the US. It is necessarily a summary of a complex area — every individual's situation is different, and this guide is not a substitute for qualified US tax advice.
This guide is for information only. US tax law is complex, changes regularly and the consequences of non-compliance are severe. Always consult a qualified US tax professional (ideally a CPA or attorney with specific US expatriate and international tax experience) for advice on your specific situation.
The Foundation: Citizenship-Based Taxation
Most countries tax people based on where they reside. If you live in the UK, you pay UK tax on your income. If you move to Dubai, you become UAE-resident and potentially no longer pay UK income tax (subject to departure rules).
The United States is different. Whether you live in London, Dubai, Bangkok or Sydney, if you are a US citizen or a US permanent resident (Green Card holder), the US taxes your worldwide income — in addition to whatever tax you pay locally. The Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC) provide partial relief in many cases:
- FEIE: excludes a set amount of foreign earned income (employment and self-employment income) — $132,900 for the 2026 tax year (it was $126,500 in 2024 and $130,000 in 2025), indexed annually for inflation. It does not cover investment income, capital gains or rental income.
- FTC: a credit for foreign taxes paid, which can reduce your US tax liability. In high-tax countries like the UK, the FTC often covers much or all of the US liability. In low-tax countries, it may not.
The interaction of the FEIE and FTC with specific income types, treaty provisions and individual circumstances is sufficiently complex that most US persons abroad require a specialist US expat tax accountant to file their returns correctly.
FBAR — Foreign Bank Account Reporting
What it is: FBAR (the Report of Foreign Bank and Financial Accounts, filed on FinCEN Form 114 with the Financial Crimes Enforcement Network) must be filed annually if you have a financial interest in, or signature authority over, foreign financial accounts whose aggregate maximum value exceeded $10,000 at any point during the calendar year.
"Foreign accounts" means any financial account held outside the United States — including bank accounts, brokerage accounts, pension accounts, and in some cases trust interests.
Who must file: US citizens, Green Card holders and certain other US persons with qualifying foreign accounts. Married couples can file jointly.
Deadline: April 15, with automatic extension to October 15. FBAR is filed separately from the US income tax return.
Penalties: The FBAR penalties are severe:
- Non-wilful violations: up to $10,000 per violation per year
- Wilful violations: up to the greater of $100,000 or 50% of the account balance at the time of the violation, per year
- Criminal prosecution for wilful violations
The IRS has vigorously enforced FBAR in recent years. The Supreme Court limited certain penalty calculations in 2023 (Bittner v US), but FBAR penalties remain among the most significant in the US tax code for international non-compliance.
Important: FBAR filing is required even if you owe no US income tax. The obligation is a reporting requirement, not a tax.
FATCA — Form 8938
FATCA (Foreign Account Tax Compliance Act) requires US persons to report specified foreign financial assets on Form 8938, attached to their US tax return, if the value of those assets exceeds certain thresholds:
- Living abroad: $200,000 on the last day of the year or $300,000 at any point during the year (for single filers)
- Married filing jointly abroad: $400,000/$600,000 thresholds
FATCA is separate from FBAR — some assets are reportable on both, some on only one. The thresholds and asset types differ. Penalties for failure to file Form 8938 start at $10,000.
FATCA also requires foreign financial institutions (banks, brokers, funds) to report US account holders to the IRS, which is why many non-US financial institutions now restrict or refuse accounts for US persons.
The PFIC Problem — Why US Persons Should Avoid Non-US Funds
This is the most practically significant investment planning issue for US persons living abroad, and it is consistently underestimated until significant damage is done.
A Passive Foreign Investment Company (PFIC) is, broadly, any non-US investment vehicle (company, fund, trust) that:
- Earns 75% or more of its gross income from passive sources, or
- Holds 50% or more of its assets in passive-income-producing assets
This captures the vast majority of non-US collective investment vehicles, including:
- UK UCITS funds and unit trusts
- European ETFs listed on non-US exchanges
- Offshore funds (e.g. Dublin or Luxembourg-domiciled UCITS)
- Many non-US investment trusts
The PFIC tax regime is extremely punitive. Without a special election, gains and distributions from PFICs are taxed at the highest applicable US ordinary income rate (currently 37%), with an interest charge added for each year of deferred gain. There is no preferential long-term capital gains rate. The compliance requirements (Form 8621, which must be filed per PFIC per year) are burdensome.
Practical consequence: US persons should generally avoid holding any non-US pooled investment vehicles. The appropriate investment structures for US persons abroad typically include:
- US-listed ETFs (domiciled and listed in the US, even if purchased through a non-US broker)
- Individual equities and bonds
- US-domiciled mutual funds (though many will not accept non-US-resident clients)
- US accounts at international brokers (Interactive Brokers International is one of the few international brokers that accepts US persons living abroad)
UK-resident US persons who have received professional financial advice in the UK and hold UCITS funds or ISA-equivalent wrappers need to be aware that these structures are likely to be treated as PFICs or otherwise unfavourably for US tax purposes — even if the UK tax treatment is entirely sensible. Get US tax advice before implementing any investment strategy.
UK Pensions and US Tax
The US treatment of UK pension schemes is complex and has been the subject of significant legal uncertainty:
- Employer contributions to a UK occupational pension may not be deductible or deferrable for US tax purposes in the same way as 401(k) contributions
- Growth within a UK pension scheme may be taxable annually in the US (depending on the treaty position and type of scheme)
- Drawdown/annuity from a UK pension is generally taxable in the US, though the US-UK double tax treaty provides some protection
The US-UK tax treaty (Article 17) provides that UK pension income is generally taxable only in the US if paid to a US resident — but the details depend on residency, citizenship and the specific pension type. The treaty is an important tool but requires careful application.
Practical advice: US persons with UK pensions should get specific advice on the US treatment of their pension before taking any action — including before making additional contributions, before requesting transfers, and well in advance of taking benefits.
The Renunciation Option
For some US persons — particularly those who have left the US permanently, have no intention of returning, and find the compliance burden and tax cost disproportionate — renunciation of US citizenship is the ultimate planning step. It is irrevocable, expensive and should only be undertaken with full understanding of the consequences.
Process:
- Appointment at a US embassy or consulate abroad (waiting times can be several months to over a year at busy posts)
- Formal oath of renunciation
- Administrative fee: $450 (reduced from $2,350 with effect from April 2026)
- Certificate of Loss of Nationality (CLN) issued
Exit tax for "covered expatriates": A "covered expatriate" is a US citizen who renounces and who meets one or more of: average annual net US income tax liability above roughly $206,000 over the 5 years before expatriation (indexed — the 2026 figure is around $206,000–$211,000); net worth of $2 million or more; or failure to certify compliance with US tax obligations for the 5 prior years.
Covered expatriates are subject to an exit tax: all assets are treated as if sold on the day before expatriation at fair market value. Gains above a lifetime exemption (approximately $890,000 for 2026, indexed) are taxed at applicable capital gains rates. Deferred compensation and pension interests have special rules.
Consequences: once you renounce, you are treated as a non-resident alien for US tax purposes going forward. You will still be taxed on US-source income (dividends from US companies, rental income from US property) as a non-resident alien. You may need a US visa to visit the US in the future.
Renunciation is a significant, permanent step. It should be considered only after exhaustive analysis with a specialist US expatriate tax attorney.
Streamlined Filing Compliance Procedures
For US persons who have genuinely failed to file required returns and FBARs due to non-wilful negligence (not deliberate evasion), the IRS offers the Streamlined Filing Compliance Procedures:
Streamlined Foreign Offshore Procedure (SFOP): for US persons not US-resident for at least 3 of the prior 6 years. File 3 years of amended or delinquent returns and 6 years of FBARs. Generally no penalties if properly structured and non-wilful.
Streamlined Domestic Offshore Procedure (SDOP): for US-resident persons. Similar filing requirements with a 5% miscellaneous offshore penalty on the highest aggregate balance.
These procedures are not available if the IRS has already started an examination or if conduct is determined to be wilful. They are an important but limited amnesty — take advice before entering them.
Practical Recommendations
- File every year, even if you think you owe no US tax. Failure to file has separate consequences from failure to pay.
- File FBAR on time, every year, for every qualifying account. The obligation is straightforward; the penalties are not.
- Do not hold non-US pooled investment funds — structure your portfolio through US-listed ETFs and individual securities where possible.
- Get US-specific tax advice from a CPA or attorney with genuine expatriate and international tax expertise — not a generalist accountant.
- Plan for renunciation years in advance if it is ever likely to be relevant — the exit tax and compliance history required make last-minute renunciation expensive and stressful.
How Global Investments can help
Global Investments works with US persons living outside the United States as part of our international wealth management and planning practice. We connect US person clients with specialist US expatriate tax advisers and coordinate their broader investment and financial planning — ensuring investment structures are appropriate for US persons, that residency and citizenship changes are planned with full US tax awareness, and that the interaction between US obligations and UK, European or other local tax rules is properly managed.
To discuss financial planning in the context of US citizenship, contact our team to be connected with the appropriate specialist resource.
This guide is a high-level overview only and does not constitute US tax or legal advice. US tax law is complex and the consequences of non-compliance are severe. Always consult a qualified US tax professional for advice on your specific circumstances.
Frequently Asked Questions
Do I still pay US tax if I live abroad?
Yes. The United States imposes income tax on its citizens and permanent residents (Green Card holders) on their worldwide income, regardless of where they live. This applies even if you have lived outside the US for many years and pay significant tax in your country of residence. You must file a US tax return annually. The Foreign Earned Income Exclusion and Foreign Tax Credit provide relief in some circumstances, but they do not eliminate US filing obligations and may not fully eliminate US tax liability depending on your income sources.
What is FBAR and what are the penalties?
FBAR (Foreign Bank Account Report, formally FinCEN Form 114) must be filed annually if you have a financial interest in, or signature authority over, any foreign financial account with an aggregate balance exceeding $10,000 at any point during the calendar year. Non-wilful violations can result in penalties of $10,000 per violation per year. Wilful violations carry penalties of up to the greater of $100,000 or 50% of the account balance at the time of the violation. Criminal prosecution is possible for wilful violations. FBAR is filed separately from your US tax return.
What is a PFIC and why should US persons avoid non-US mutual funds?
A Passive Foreign Investment Company (PFIC) is, broadly, any non-US fund or investment vehicle that earns primarily passive income — which includes most non-US open-ended mutual funds, UCITS funds, offshore funds and many ETFs not listed in the US. The US PFIC tax rules are extremely punitive: gains are taxed at the highest marginal rate regardless of holding period, with an interest charge added for each year of deferral. The practical effect is that holding UCITS funds (common in UK and European portfolios) as a US person can result in an effective tax rate that is higher than the headline rate, with significant compliance complexity. Most US persons should hold US-listed ETFs and individual securities instead.
What is the process for renouncing US citizenship?
Renunciation is irrevocable and requires an in-person appointment at a US embassy or consulate abroad. You must sign a formal oath of renunciation and affirm that you understand renunciation is permanent. There is a $450 administrative fee (reduced from $2,350 with effect from April 2026). 'Covered expatriates' — broadly, those with net worth above $2 million or average annual US tax liability above a threshold over the prior 5 years — are subject to an exit tax that treats all assets as if sold on the day before expatriation, with gains above an exemption amount subject to tax. Renunciation requires careful planning, ideally years in advance, with specialist US tax and immigration counsel.
What is the Streamlined Filing Compliance Procedure?
The IRS Streamlined procedures are designed for US persons who have failed to file required US tax returns and FBARs but whose non-compliance was non-wilful (i.e. not deliberate). There are two variants: Streamlined Foreign Offshore Procedure (for those who have not been US-resident in the prior 3 years) and Streamlined Domestic Offshore Procedure (for those who have been US-resident). The foreign procedure generally results in no penalties for past non-compliance. The domestic procedure imposes a 5% miscellaneous offshore penalty. Both require filing 3 years of back returns and 6 years of back FBARs. These procedures are not available to those the IRS has already identified for examination.
This guide is for general information only and does not constitute legal, financial or immigration advice. Programme details change; verify current requirements with a qualified immigration lawyer before making any investment or application. Investment values can fall as well as rise.