US Citizenship-Based Taxation Explained: What Every American Expat Must Know

The United States stands virtually alone among developed nations in subjecting its citizens and long-term green card holders to federal income tax on worldwide income, regardless of where they live. Every other major economy taxes individuals on the basis of residence — once you leave, your home country's tax authority largely loses its claim on you. The US does not work this way.

For HNW Americans living abroad, this creates a permanent, costly, and complex compliance obligation that affects investment structures, business ownership, retirement planning, and estate strategy. Understanding the framework is essential for any American citizen planning an international life — or for their advisers, accountants, and family members who may be affected.

---

The Legal Basis

US citizenship-based taxation (CBT) derives from the Internal Revenue Code, which imposes income tax on "every individual who is a citizen or resident of the United States." The citizenship basis has been upheld by the US Supreme Court (Cook v. Tait, 1924) and has never been legislatively removed. Periodically, efforts are made in Congress to shift the US to a residence-based system, but as of 2026, CBT remains the law.

The obligation applies to:

• US citizens (by birth, naturalisation, or acquisition by descent)
• Lawful permanent residents ("green card holders") — discussed separately below
• Individuals who meet the substantial presence test (more than 183 days in the US, or the weighted three-year test)

Long-term green card holders face an additional trap: the long-term resident definition under Section 877 applies to anyone who has held a green card for at least 8 of the last 15 years. Long-term residents who abandon their green card face exit tax rules similar to those applied to renouncing citizens.

---

The Foreign Earned Income Exclusion (FEIE)

The primary relief mechanism for Americans abroad is the Foreign Earned Income Exclusion (FEIE) under Section 911 of the Internal Revenue Code. For the 2026 tax year, the exclusion amount is $132,900, indexed annually to inflation.

To claim the FEIE, you must meet either:

• The bona fide residence test: you are a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year; or
• The physical presence test: you are physically present in a foreign country or countries for at least 330 full days during any 12 consecutive months

Key limitations:

• The exclusion applies to earned income only — wages, salary, professional fees, and self-employment income. Passive income (dividends, interest, capital gains, rental income) is not excluded
• The exclusion cannot reduce self-employment tax (Social Security and Medicare taxes continue to apply to self-employment income in most cases)
• The exclusion is all-or-nothing for the year you elect it; you cannot elect it for part of a year

For most HNW expats, the FEIE is insufficient protection on its own. Individuals with significant investment income, business income, or compensation above the exclusion threshold remain exposed to US tax on the excess.

---

Foreign Tax Credit (FTC)

The Foreign Tax Credit (FTC) under Section 901 allows US taxpayers to offset US tax with taxes paid to foreign jurisdictions on the same income. This is the primary mechanism for eliminating double taxation on income that exceeds the FEIE or that is not covered by it.

The FTC is subject to limitation rules that restrict the amount of credit available to the US tax imposed on foreign-source income. The mechanics involve "baskets" (general income, passive income, and others) and complex ordering rules that interact with the FEIE election in non-obvious ways.

In countries with high income tax rates (UK, France, Germany, Sweden), the FTC typically eliminates or nearly eliminates US residual tax on employment income and most domestic investment income. In low-tax jurisdictions — including many of the UAE, Gulf states, and Caribbean countries favoured by international investors — the FTC provides little or no shelter, and US tax is payable at full US rates after the FEIE is exhausted.

---

Global Intangible Low-Taxed Income (GILTI)

American business owners with foreign corporations face a particularly burdensome regime introduced by the Tax Cuts and Jobs Act of 2017: GILTI (Global Intangible Low-Taxed Income).

GILTI effectively requires US shareholders (those owning 10% or more of a foreign corporation) to include a deemed dividend in their US taxable income annually, representing a share of the corporation's income that is considered insufficiently taxed. The regime is complex, but in simplified terms:

• All US persons who are more than 10% shareholders in a Controlled Foreign Corporation (CFC) are within scope
• CFC income above a "routine return" threshold (10% of the adjusted basis of depreciable tangible property) is potentially GILTI-taxable
• A Section 962 election allows individual US shareholders to access the corporate-rate FTC, reducing (but not eliminating) the GILTI burden
• GILTI has caused significant distress for American entrepreneurs and business owners operating overseas, and for trust beneficiaries

Professional US tax advice specifically addressing CFC and GILTI issues is essential for American expats running businesses through foreign corporate structures.

---

Passive Foreign Investment Companies (PFICs)

One of the most unexpected traps for Americans abroad is the PFIC regime under Sections 1291–1298.

A Passive Foreign Investment Company is any foreign corporation that meets either:

• A passive income test (75% or more of income is passive), or
• A passive asset test (50% or more of assets produce or are held for passive income)

This definition captures virtually all:

• Non-US investment funds (including UCITS funds popular in the UK and EU)
• Non-US unit trusts
• Non-US ETFs
• In some cases, offshore insurance products with investment components

For Americans resident in the UK, for example, holding ISA investments, UK UCITS funds, or UK investment trusts creates PFIC exposure. The default PFIC tax regime is extremely punitive: gains and excess distributions are taxed at the highest applicable marginal rate plus an interest charge calculated as if the income had been received ratably over the holding period. This can result in effective tax rates well above 50%.

The alternatives — making a QEF (qualified electing fund) election or a mark-to-market election — require reporting from the fund itself that most non-US funds will not provide, making compliance deeply problematic.

For many Americans abroad, the PFIC regime effectively bars access to mainstream local investment products, forcing them into US-listed securities or US domiciled funds.

---

FBAR and Form 8938: Reporting Obligations

US persons with foreign financial accounts must comply with two overlapping reporting regimes:

FBAR (FinCEN Report 114): Required if the aggregate value of all foreign financial accounts exceeds $10,000 at any point during the calendar year. The non-wilful FBAR penalty is around $10,000 per report per year (the US Supreme Court held in Bittner v. United States, 2023, that the non-wilful penalty applies per annual report, not per account; the figure is adjusted for inflation); wilful violations can reach the greater of around $100,000 or 50% of account value per violation.

Form 8938 (FATCA): Required for US persons with specified foreign financial assets above threshold amounts (USD 50,000 for individuals in the US; higher for individuals abroad). Failure to file carries a USD 10,000 penalty per form per year, with potential 40% accuracy-related penalties on unreported amounts.

Both regimes operate independently and overlap in scope. Holding a non-US bank account, brokerage account, pension, or similar financial asset typically triggers both filing obligations.

---

Compliance Costs

The annual compliance cost for a US expat with moderate complexity — employment income, a foreign pension, a property investment, and modest investment accounts — typically runs to $5,000 to $15,000 per annum in professional fees. More complex situations (business ownership, trusts, multiple countries) can easily reach $30,000 to $50,000 or more annually.

This ongoing compliance burden, compounded by the investment restrictions created by the PFIC regime and the business restrictions created by GILTI, is a primary driver of the increasing rate of US citizenship renunciation — which reached record levels in recent years.

---

Why Some Americans Renounce

The combination of:

• Tax on worldwide income regardless of residence
• PFIC barriers to non-US investment
• GILTI impact on overseas business ownership
• FBAR and Form 8938 compliance burden
• The risk of US withholding tax on US-source income (which does not apply to non-resident aliens)
• The reputational complexity for some foreign banks of having US-person clients

…leads many HNW Americans abroad to at least consider renunciation. Renunciation is irrevocable and carries its own significant consequences, including the exit tax regime for "covered expatriates" (see our separate guide on American citizenship renunciation). It is not a decision to be taken lightly or without specialist advice.

---

Green Card Holders

Long-term green card holders face essentially the same tax obligations as US citizens during the period of their green card. Upon surrendering a green card after holding it for 8 or more years in the preceding 15, the long-term resident exit tax rules apply. Individuals who surrender a green card before the 8-year threshold can cease US tax obligations on foreign income from the date of surrender, subject to completing a final tax return.

---

How Global Investments Can Help

US citizenship-based taxation is one of the most specialised areas of international tax, and its interaction with investment structures, citizenship planning, and estate strategy requires a multi-disciplinary approach. Our advisers work with clients to:

• Review the tax impact of US citizenship on investment portfolios, business structures, and offshore holdings
• Coordinate with specialist US-qualified international tax advisers in our professional network
• Assess whether renunciation may be appropriate (and if so, the pre-renunciation planning required to minimise exit tax exposure)
• Identify treaty positions and planning opportunities available to dual nationals in high-tax jurisdictions
• Review green card holder situations, particularly in the approach to the 8-year long-term resident threshold

For American citizens considering international mobility, the tax dimension of US citizenship should be front and centre in any planning exercise — not an afterthought. Contact us to discuss your situation.

This guide is for general information only and reflects the position as of 2026. US tax law is complex, subject to change, and interacts with the laws of foreign jurisdictions in ways that require specialist advice in each case. Global Investments does not provide tax or legal advice. Always seek qualified US tax counsel.