Financial Planning for US Persons Living Abroad: Key Issues and Considerations

Overview

US citizens, Green Card holders, and certain other US persons living outside the United States face one of the most complex tax situations of any group of internationally mobile individuals. Unlike almost every other country, the United States taxes its citizens on their worldwide income — regardless of where they live or how long they have been abroad. This citizenship-based taxation model creates ongoing US filing obligations, restrictions on investment choices, and planning complexity that few other nationalities encounter.

This guide provides an overview of the key issues. It is intended for general awareness only. The rules governing the taxation of US persons abroad are highly complex and change frequently. We strongly recommend working with a specialist US tax adviser (a CPA or attorney with international tax expertise) for any personal advice. Global Investments can make referrals to appropriate specialists.

Nothing in this guide constitutes US tax advice. Rules and thresholds change annually. Always consult a qualified US tax professional.

The Worldwide Income Obligation

Citizenship-Based Taxation

The United States applies income tax based on citizenship and permanent residency, not residence. This means:

• A US citizen who has lived in the UK for 20 years and never set foot in the US remains a US taxpayer
• A Green Card holder who has moved to Dubai and surrendered their Green Card may continue to have US tax obligations until the Green Card is formally abandoned (with Form I-407)
• Children born to US citizens abroad may be US citizens themselves and subject to US tax — even if they have never lived in the US

Annual Filing Requirements

US persons must file an annual Form 1040 (US Individual Income Tax Return) with the IRS, reporting worldwide income. Additional forms may be required depending on circumstances, including:

• Schedule B: For foreign interest and dividends, and to disclose foreign financial accounts
• Form 2555: For the Foreign Earned Income Exclusion
• Form 1116: For the Foreign Tax Credit
• Form 8938: For FATCA reporting of foreign financial assets
• Form 5471: For US shareholders in foreign corporations (if ownership thresholds are met)
• Form 8621: For holders of Passive Foreign Investment Companies (PFICs)
• Form 3520: For transactions with or ownership of foreign trusts

Missing or incorrectly filed forms can result in significant penalties even if no additional tax is due.

FBAR: Foreign Bank Account Reporting

What the FBAR Requires

FinCEN Form 114 (FBAR) must be filed annually by any US person who has a financial interest in, or signature authority over, foreign financial accounts with an aggregate value exceeding $10,000 at any point during the year. "Financial accounts" includes bank accounts, brokerage accounts, mutual fund accounts, and certain other accounts.

The FBAR is filed separately from the tax return (online via the FinCEN BSA E-Filing System) and is due on 15 April, with an automatic extension to 15 October.

Penalties for Non-Compliance

FBAR non-compliance carries severe penalties:

• Non-wilful violation: up to $10,000 per account per year (amounts adjusted periodically)
• Wilful violation: up to the greater of $100,000 or 50% of the account balance per year; criminal prosecution is possible in egregious cases

Many US persons living abroad — including those who have never been advised of their FBAR obligations — have used the IRS's offshore voluntary disclosure and streamlined compliance procedures to come into compliance. These programmes have specific eligibility criteria; take specialist advice.

Form 8938: FATCA Reporting

In addition to the FBAR, US persons must also disclose specified foreign financial assets on Form 8938 (filed with the tax return) if the aggregate value exceeds certain thresholds (which vary by filing status and whether the individual resides in the US or abroad). Form 8938 captures a broader range of assets than the FBAR, including interests in foreign entities and certain foreign financial contracts.

The overlap between FBAR and Form 8938 — and the different thresholds, definitions, and penalties — creates significant compliance complexity.

PFIC Rules: The Investment Trap

What Is a PFIC?

A Passive Foreign Investment Company (PFIC) is, broadly, any non-US corporation that earns primarily passive income or holds primarily passive assets. Under this definition, the vast majority of non-US investment funds — including European-domiciled ETFs (such as those listed in Dublin or Luxembourg), offshore unit trusts, and foreign mutual funds — are PFICs.

Why PFIC Treatment Is Punitive

Under the default PFIC rules (Section 1291 regime), gains and certain distributions from PFIC investments are not taxed as capital gains. Instead:

• The gain is allocated across the years the investment was held
• Tax is calculated at the highest ordinary income rate for each year (not the preferential long-term capital gains rate)
• An interest charge is added to approximate the time value of the deferred tax

The combined effect typically results in a far higher tax liability than if the investment had been held directly in US-domiciled funds taxed at capital gains rates. The administrative burden is also significant: Form 8621 must be filed for each PFIC held.

Practical Implications

US persons abroad should generally:

• Avoid non-US investment funds (European ETFs, offshore unit trusts, foreign mutual funds)
• Hold US-domiciled funds (US-listed ETFs, US mutual funds) even if investing from outside the US
• Seek specialist advice before investing in any collective investment vehicle outside the US

This creates a practical challenge: many platforms outside the US do not offer US-domiciled funds due to FATCA-related compliance costs. US persons abroad may find their investment choices restricted to direct securities, US-domiciled funds held through specialist platforms, or other non-PFIC assets.

The Foreign Earned Income Exclusion (FEIE)

What the FEIE Covers

The Foreign Earned Income Exclusion allows qualifying US persons to exclude a portion of their foreign earned income from US federal income tax. To qualify:

• The individual must have a foreign tax home (broadly, principal place of business or employment)
• They must meet either the bona fide residence test (genuine foreign resident for a full tax year) or the physical presence test (330 full days outside the US in any 12-month period)
• The exclusion applies only to earned income (wages, salaries, net self-employment income) — not to investment income, rental income, pension income, or other passive income

Using FEIE vs Foreign Tax Credit

US persons often have the choice of claiming the FEIE or the Foreign Tax Credit (see below), or a combination. The optimal choice depends on the individual's income mix, the foreign tax rates they face, and other factors. This is an area where specialist advice is particularly valuable.

The Foreign Tax Credit

How It Works

The Foreign Tax Credit (claimed on Form 1116) allows US persons to offset US tax on foreign-source income by the foreign taxes paid on the same income. The credit reduces — but does not eliminate — US tax on foreign income.

The Foreign Tax Credit operates through a "basket" system: credits are calculated separately for different categories of income (passive income, general income, foreign branch income, etc.), and excess credits in one basket cannot generally be used to reduce tax in another.

Limitations

The Foreign Tax Credit is limited to the US tax attributable to the foreign income. If the foreign country taxes income at a higher rate than the US, the excess foreign tax generates an excess credit (which may be carried forward), but does not generate a refund from the US.

GILTI: Global Intangible Low-Taxed Income

US persons who own 10% or more of a foreign corporation may be subject to the GILTI rules (Global Intangible Low-Taxed Income), introduced by the Tax Cuts and Jobs Act of 2017. GILTI can result in current US taxation on the undistributed income of foreign companies — even if no dividend has been paid. Business owners who have established foreign companies should seek specific advice on GILTI and related provisions (Subpart F income).

Exit Tax: Section 877A

US citizens who renounce their citizenship and "covered expatriates" (broadly, those with net worth above approximately $2 million or average annual net tax liability above certain thresholds, at the time of writing) are subject to an exit tax under Section 877A. The exit tax treats most assets as if sold on the day before expatriation — triggering tax on unrealised gains.

Renunciation of US citizenship should only be undertaken with full advice from a specialist US tax attorney. The process is irreversible, may involve expatriation tax, and requires filing Form 8854.

Practical Planning Priorities for US Persons Abroad

1. File all required US returns and FBARs — non-compliance carries escalating penalties
2. Audit your investment portfolio for PFICs and restructure where appropriate
3. Review any ownership in foreign corporations for GILTI, Subpart F, and PFIC overlap
4. Ensure foreign trusts are properly reported (Forms 3520 and 3520-A)
5. Do not assume your bank or investment manager is handling US compliance — they typically are not
6. Consider the interaction between US and local tax obligations before restructuring

How Global Investments Can Help

Global Investments works with US persons living outside the United States who need financial planning and wealth management advice that takes their US obligations into account. While we refer clients to qualified US tax advisers (CPAs and international tax attorneys) for US-specific filing and technical advice, we can help coordinate that advice with your broader financial planning, investment strategy, and international wealth structure.

Serving clients internationally across the UK, UAE, Thailand, Spain, Greece, and beyond, we understand the practical challenges of managing a multi-jurisdictional financial life as a US person. Contact us to discuss how we can help.