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What happens to your US taxes when you move abroad?
Moving abroad does not end your US tax obligations. The United States taxes citizens and green card holders on worldwide income wherever they live, so you keep filing a US return. Reliefs like the Foreign Earned Income Exclusion and Foreign Tax Credit usually reduce the tax to nothing, but separate reports on foreign accounts still apply.
Most people who move abroad in midlife do it for reasons that have nothing to do with tax — a partner, a parent, a divorce settled, a house sold, a decision that the second half should look different from the first. The tax consequences arrive afterwards, usually in the form of a form nobody mentioned.
This page covers what actually changes, what does not, and which parts are worth handling before you go.
Nearly every country taxes people on the basis of where they live. The United States is one of a very small number that taxes on the basis of who you are.
If you are a US citizen or a green card holder, you file a US tax return on your worldwide income for as long as you hold that status, wherever in the world you happen to be living. Moving to Portugal does not change this. Living in Portugal for fifteen years does not change this. Paying Portuguese tax does not change it either.
Everything difficult about expatriate tax follows from this single fact, and most of the bad surprises come from people who assumed the ordinary rule applied to them.
This distinction is worth being precise about, because conflating the two causes an enormous amount of unnecessary alarm.
Filing is the obligation to submit a return. It does not go away when you leave.
Owing is what remains after the relief provisions have been applied — and for a great many Americans living abroad, that number is zero.
Two mechanisms do most of the work.
The Foreign Earned Income Exclusion removes a capped amount of foreign earned income from US taxation altogether. Earned means wages and self-employment income; it does not cover pensions, rental income, dividends or capital gains. To use it you must pass one of two tests demonstrating that you genuinely live abroad rather than occasionally visiting.
The Foreign Tax Credit works differently. Rather than excluding income, it offsets your US tax bill by the tax you have already paid to another country. Where the foreign country taxes more heavily than the United States does, this typically eliminates the US liability and can generate credits to carry forward.
Which of the two serves you better depends on the country, your income mix, and what you expect the next several years to look like. They also interact in ways that are easy to get wrong — electing the exclusion and later revoking it has consequences that last years.
The critical point: neither relief is automatic. Both are claimed on a return you have to file. Not filing does not shelter you from tax. It forfeits the provisions that would have removed the tax, and leaves the underlying liability standing.
The tax is usually manageable. The information reporting is where people get hurt, because the penalty structure bears no relationship to the amount of money involved.
If the combined maximum balance of your foreign financial accounts exceeds $10,000 at any point in the year, you must file a Report of Foreign Bank and Financial Accounts. Note what that threshold means: it is the aggregate of every account, at its highest point, not the year-end total. Three accounts holding $4,000 each cross it.
The FBAR reports balances rather than income. It is filed with FinCEN, separately from your tax return, and it is easy — which makes the penalties for skipping it especially painful to explain to someone afterwards.
Form 8938 reports specified foreign financial assets and is filed with your return. The thresholds are considerably higher than the FBAR’s and vary depending on whether you live abroad and how you file. Many people have to file both forms, reporting overlapping information to two different agencies, which is as sensible as it sounds.
Two traps worth naming. Foreign pension arrangements are not automatically treated the way US retirement accounts are, and whether a given scheme gets favorable treatment often depends on a specific treaty article. And ordinary foreign mutual funds are frequently classified as Passive Foreign Investment Companies, which carries a punitive and administratively miserable tax regime. The bank in your new country will cheerfully recommend a local fund. It is often the single most expensive thing you can buy.
Federal tax follows citizenship. State tax follows something messier.
Some states let you go cleanly: stop being resident, stop being taxed. Others take the position that you remain taxable until you establish a domicile somewhere else, and “somewhere else” being foreign does not necessarily count. Ties like a retained property, a driving license, a voter registration, or a bank account can be enough to keep you on the rolls.
This is one of the few genuinely state-specific questions in the whole area, and the answer changes completely depending on where you are departing from. It is also one of the easiest things to handle correctly if dealt with before the move and one of the hardest to unwind afterwards.
If you work abroad, you can face social security contributions in both countries on the same earnings. The United States has totalization agreements with a number of countries specifically to prevent this, which assign your contributions to one system or the other and let periods in each count toward eligibility.
Whether one exists with your destination, and what it says, is worth knowing before you accept a foreign employment contract rather than after.
The recurring theme across all of this is sequencing. The same decision is simple in the months before a move and awkward, expensive, or impossible in the year after it.
Establishing the state position, dealing with accounts and elections while you still have a US address and a US phone number that banks recognize, understanding how your income will be characterized once it is foreign, and knowing which reports will attach to you before you trip the thresholds — all of that is ordinary preparatory work beforehand and remedial work afterwards.
The guide below is the checklist version of it.
US citizens keep filing US tax returns wherever they live. Tiffani Lindstrom, CPA explains why the best-known tax break for Americans abroad rarely helps retirees, and what to settle before a move rather than after it.