Global & cross-border · Pillar

The U.S. Expat Tax Playbook: FEIE, FTC, Treaty, FBAR & PFIC

The U.S. taxes its citizens and green-card holders on worldwide income — wherever they live, whatever they earn. This is the field guide to doing it correctly: the choices that actually move the bill, the traps that quietly create six-figure liabilities, and the compliance path back if you're behind.

By The Empower Capital Team · Updated May 3, 2026 · ~13 min read

Who owes U.S. tax abroad

The United States is one of two countries (Eritrea is the other) that taxes its citizens on worldwide income regardless of where they live. The reach is broad:

• U.S. citizens. Always required to file if income exceeds the standard threshold, no matter where they live.
• Green-card holders. Lawful permanent residents are U.S. tax residents until they formally surrender the card and complete the §877A analysis. Long absences do not, by themselves, end U.S. tax residency.
• Substantial-presence-test residents. Foreign nationals who spend enough days in the U.S. (current-year days plus weighted prior-year days) become U.S. tax residents for the year, with worldwide-income exposure.

Filing thresholds are the same as for domestic taxpayers, but the automatic two-month extension to June 15 applies to taxpayers abroad on April 15. Additional extensions to October 15 and (in some cases) December 15 are available with timely filings.

FEIE vs. FTC: choosing correctly

Two principal mechanisms reduce the U.S. tax burden on foreign-source income:

• Foreign Earned Income Exclusion (Form 2555). Excludes up to the annual cap (~$130K in 2026, indexed) of foreign-earned wages and SE income. Requires either Bona Fide Residence or Physical Presence Test qualification. Plus a foreign-housing exclusion or deduction with city-specific caps.
• Foreign Tax Credit (Form 1116). Dollar-for-dollar credit for income taxes paid to a foreign jurisdiction, applied against U.S. tax on the same income. Limited per category and not refundable, but can be carried back one year and forward ten.

The decision is not "which one am I eligible for" — most expats are eligible for both. The decision is which produces the lower combined liability over a multi-year horizon. Considerations:

• Country tax rate. In high-tax countries (UK, Germany, France, Australia), FTC almost always wins on earned income because foreign tax credits exceed U.S. liability and produce carryforwards. In low- or no-tax countries (UAE, Singapore for some income, Bermuda), FEIE wins because there are no credits to claim.
• Family structure. Taking FEIE disqualifies you from the refundable Additional Child Tax Credit. Families with multiple U.S. children often do better on FTC even in moderate-tax countries.
• Retirement contributions. Income excluded under FEIE is not "earned income" for IRA contribution purposes. If you want to fund a Roth IRA, FTC may be required.
• State residency. Some states (notably California) do not honor FEIE on the state side. The state-level analysis is independent.
• Switching. You can switch from FEIE to FTC, but if you revoke FEIE you can't re-elect for five years without IRS consent.

Honest practice is to model both every year. Switching when the math says to switch is what professional preparation looks like.

Treaty positions — when they help

The U.S. has income-tax treaties with roughly 70 countries. Treaty positions can:

• Resolve dual residency via tie-breaker rules (permanent home → center of vital interests → habitual abode → nationality → competent authority).
• Reduce withholding on dividends, interest, and royalties between treaty partners.
• Allocate taxing rights on pensions, social-security-equivalent payments, and certain employment income.
• Provide exemptions for visiting students, teachers, researchers, and short-term business visitors.

Two important caveats. First, the savings clause in most U.S. treaties preserves the U.S.'s right to tax its own citizens as if the treaty did not exist — meaning many treaty benefits are not available to U.S. citizens. Second, treaty positions taken on a U.S. return often require Form 8833 disclosure; failure to disclose can result in penalties even if the underlying position is correct.

The right way to use a treaty is to read the actual article (not a summary), apply it to the facts, document the position in workpapers, and disclose where required. The wrong way is to assume "treaty country" means "treaty exemption."

FBAR and FATCA reporting

Two separate information-reporting regimes that almost every U.S. person abroad must navigate:

• FBAR — FinCEN Form 114. Required when the aggregate maximum value of all foreign financial accounts exceeds $10,000 at any point in the calendar year. Filed electronically with FinCEN, separate from the tax return. Due April 15 with automatic extension to October 15. Covers bank accounts, brokerage, certain life insurance and pensions, and accounts you have signature authority over even if not your own.
• FATCA — Form 8938. Filed with the tax return. Higher reporting thresholds than FBAR ($200K end-of-year or $300K any-time-of-year for unmarried taxpayers abroad; lower for U.S. residents and joint filers). Covers a slightly different set of "specified foreign financial assets," with overlap. Both forms can be required for the same accounts.

Penalty exposure: non-willful FBAR violations carry penalties up to $10,000 per year (per recent Supreme Court resolution in Bittner, per form, not per account). Willful violations can run the greater of $129,210 or 50% of account balance, per year. Form 8938 non-filing is $10,000 plus continuing-failure penalties. The numbers are not deterrents — they are existential. Reporting compliance is non-negotiable.

The PFIC trap

A Passive Foreign Investment Company (PFIC) is, broadly, any foreign corporation where 75%+ of income is passive or 50%+ of assets produce passive income. In practice, almost every foreign mutual fund, foreign ETF, and foreign-domiciled pooled investment is a PFIC. Default §1291 treatment is severely punitive:

• Gain on disposition is taxed at the highest ordinary rate (not capital-gain rates).
• Gain is allocated ratably across the entire holding period and "thrown back" to prior years.
• An interest charge accrues on the deferred tax for prior years, often pushing effective rates above 50%.
• Holdings must be reported annually on Form 8621.

The fixes:

• QEF election (Form 8621). Treats PFIC income as flow-through, taxed annually at character-appropriate rates. Requires the PFIC to provide a PFIC Annual Information Statement — most foreign funds do not.
• Mark-to-market election (Form 8621, §1296). Available for PFICs with marketable interests (most ETFs). Treats annual unrealized gain as ordinary income; losses limited to prior MTM inclusions. Far better than §1291 default.

The right move at the strategy level is usually to avoid PFICs entirely by holding U.S.-domiciled funds in a U.S. brokerage. For expats with foreign brokerage accounts (often required by the local employer), restructuring to U.S. holdings — when permitted by local law — is the cleanest path.

Streamlined Filing Compliance

If you are a U.S. person who has not been filing while abroad, the IRS Streamlined Filing Compliance Procedures provide a path to come current with no penalty for non-willful conduct. Two tracks:

• Streamlined Foreign Offshore (SFO). For taxpayers who meet a non-residency requirement (typically 330 days outside the U.S. in at least one of the prior three years). File the most recent three years of delinquent returns, six years of FBARs, pay any tax and interest owed. No penalty.
• Streamlined Domestic Offshore (SDO). For U.S.-resident taxpayers with foreign-account exposure. Same three-year/six-year package, but a 5% miscellaneous offshore penalty applies on the highest aggregate account balance.

Both tracks require a non-willful certification (Form 14653 for SFO, 14654 for SDO). Willful conduct is disqualifying — and "willful" is interpreted broadly in case law. We assess eligibility carefully before recommending; for clients whose facts suggest willfulness, the IRS Voluntary Disclosure Program is the alternative track.

§877A exit tax for renouncers

Renouncing U.S. citizenship or relinquishing a long-held green card triggers analysis under §877A. If you are a "covered expatriate" — generally meaning average annual U.S. tax liability above a threshold (~$201K in recent years), net worth above $2M, or unable to certify five years of compliance — a deemed mark-to-market sale of all assets occurs the day before expatriation. Net unrealized gain above the lifetime exclusion (~$890K in 2026) is taxed at applicable rates.

Specialized rules for retirement accounts (deferred), 401(k)s (irrevocably waived treaty benefits), trusts (special rules), and post-expatriation gifts to U.S. persons (succession-tax style). The exposure can be enormous — and the planning runway matters. The right time to start is two to three years before expatriation, not two months.

Pre-renunciation planning typically includes basis steps where available, gift timing to non-U.S. persons (subject to gift-tax limits), positioning of retirement accounts, and careful analysis of which assets to liquidate before vs. after expatriation. Coordination with your immigration attorney is required.

Inbound: arriving in the U.S.

The year you become a U.S. tax resident is the most important planning year of your U.S. tax life. Pre-residency, you are taxed only on U.S.-source income; post-residency, on worldwide income. The transition itself is the planning window. Common moves:

• Capital-gains harvest. Realize appreciated foreign assets before residency starts. Step the basis up; future appreciation is the only U.S.-taxable amount.
• Foreign-pension review. U.S. tax treatment of foreign pensions is rarely favorable. Some pre-residency restructuring or treaty positioning can preserve tax-deferred treatment.
• Foreign-trust review. Settlor-grantor treatment, distributable-net-income computations, and information reporting (Forms 3520/3520-A) all change at the moment of residency. Pre-residency restructuring is often advisable.
• PFIC unwinding. Sell foreign mutual funds before residency starts; replace with U.S.-domiciled funds in a U.S. brokerage account.
• Equity-comp sourcing. Stock options and RSUs granted abroad and vesting after U.S. arrival require sourcing under day-count formulas. Documentation begins on day one.

Where this guide stops

Cross-border tax is fact-driven. The general framework above is right; the specific application depends on your country, family, asset profile, immigration plan, and timeline. A 15-minute discovery call surfaces the highest-leverage moves; the engagement implements them and brings any prior-year exposure to compliance.