Moving Abroad as a US Citizen: How to Prepare for a Simpler, Less Costly Tax Life

Moving abroad as a US citizen opens up exciting new opportunities, whether it’s for career growth, lifestyle, family, or adventure. But along with the move comes something you can’t leave behind: your US tax obligations.

The United States is one of the few countries that taxes its citizens based on citizenship, not residency. No matter where you live, you’re required to file a federal tax return every year and report your worldwide income. Depending on your situation, you may also be expected to comply with additional filing requirements, including state tax returns, foreign account reporting, and more.

We often hear cautionary tales from US expats who run into unnecessary tax complications, penalties, or double taxation, all because they didn’t prepare properly before their move.

Here’s how you can avoid that mistake.

Understand Your US Tax Responsibilities

The most important thing to know is that your tax responsibilities as a US citizen continue, regardless of where you live. You must file a US federal tax return (Form 1040) each year if your income exceeds basic thresholds (which vary by filing status), even if you pay taxes in your new country.

You’re also required to report worldwide income. This includes wages, investment income, rental income, business income, pensions, and retirement distributions, no matter where they’re sourced.

Key Strategies to Simplify Tax Filing & Reduce Tax Burden

1. Time Your Move Strategically

The timing of your move can significantly affect your overall tax burden and filing complexity. If you move early or midway through the calendar year, you may face the prospect of filing as a tax resident in both the US and your new country for the same year. This can complicate your tax filings, trigger partial tax residency in both places, and lead to overlapping tax liabilities.

Conversely, moving later in the year or closer to year-end can minimize the number of months you’re considered a resident in your new country, giving you time to prepare, close out financial ties in the US, and simplify your first year’s filing obligations.

Additionally, if you’re planning to use the Foreign Earned Income Exclusion (FEIE), moving at the right time ensures you can meet either:

• The Physical Presence Test (330 days outside the US in a 12-month period), or

• The Bona Fide Residence Test (being a resident of a foreign country for an entire tax year).

  
  

  Action: Coordinate your relocation date with both US tax rules and your destination country’s tax residency start date to minimize dual tax years and maximize eligibility for exclusions and credits.

You may consider using expats tools such as Aequify to help you plan your move date to simply tax filing.

2. Decide Between Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC)

The US offers two main ways to help reduce or eliminate double taxation:

• Foreign Earned Income Exclusion (FEIE): You can exclude up to $126,500 (for tax year 2024) of foreign earned income. To qualify, you must either:

• Pass the Physical Presence Test (spend 330 days abroad within a 12-month period), or

• Pass the Bona Fide Residence Test (be a resident of a foreign country for an entire tax year).

• Foreign Tax Credit (FTC): If you’re paying taxes in your new country, you can offset your US tax liability by claiming a credit for those taxes. This is often more beneficial if you’re in a high-tax country like Canada or the UK.

Action: Evaluate your income type and the tax rates in your new country to determine whether FEIE, FTC, or a combination works best for you. Making the right choice will prevent unnecessary double taxation.

3. Manage Foreign Bank Account Reporting (FBAR & FATCA)

Living abroad usually means opening local bank accounts, but be aware of additional reporting requirements:

• FBAR (FinCEN Form 114): If your total foreign account balances exceed $10,000 at any time during the year, you must file an FBAR.

• FATCA (Form 8938): If your foreign financial assets exceed certain thresholds (starting at $200,000 for individuals living abroad), you must file Form 8938 with your tax return.

Action: Simplify reporting by limiting the number of foreign accounts, consolidating balances where possible, and keeping organized records.

You may consider using tools such as Aequify (www.aequify.com) that tracks your balances across 30+ countries and flag if you need to file for FBAR or FATCA.

4. Avoid Foreign Mutual Funds (PFICs)

Many foreign mutual funds, ETFs, and pooled investment products are classified by the IRS as Passive Foreign Investment Companies (PFICs).

These come with complex annual reporting (Form 8621) and Punitive tax treatment on gains.

Action: Stick with US-based brokerage accounts or get expert advice before investing abroad. Avoiding PFICs reduces your tax filing headaches significantly.

5. Review Foreign Retirement Accounts Before Contributing

Not all foreign retirement plans receive favorable tax treatment in the US. For example:

• Canadian RRSPs may qualify for tax deferral under treaty rules, but accounts like TFSAs (Canada) or ISAs (UK) are taxable in the US.

• UK pensions and similar plans may require special reporting and may be taxable as they grow.

Action: Understand the US tax treatment of any foreign pension accounts before you start contributing.

6. Consider Break Ties with Your Home State Properly if you don’t plan to return for a foreseeable future.

Many expats overlook the fact that their US state tax obligations may continue after moving abroad, particularly if they lived in “sticky” states like California, New Mexico, Virginia, or South Carolina.

If you don’t take formal steps to terminate state residency, you may be required to file state tax returns annually and pay taxes on worldwide income, even while living abroad.

Action : Terminating state residency could mean:

• Canceling voter registration

• Surrendering your state driver’s license

• Selling or renting out your primary home

• Closing local bank accounts

• Filing a final “part-year” resident state tax return documenting your departure

7. Keep US-Based Financial Accounts Active

To reduce unnecessary reporting and avoid triggering FATCA or PFIC issues, it’s often easier to keep your primary bank and investment accounts in the US.

Action: Only open essential foreign accounts (e.g., for daily living) and keep your core financial structure US-based.

8. Plan for Capital Gains & Estate Tax Exposure

Owning property, investments, or retirement accounts in multiple countries can lead to complicated tax treatment, particularly when it comes to capital gains or inheritance taxes.

Action : Work with an experienced cross-border tax advisor to coordinate your estate plan and avoid unintended exposure to estate, gift, or inheritance taxes in both countries. Make sure the tax advisor understand the tax regulations of US and the country of residence.

9. Understand Currency Exchange

Currency exchange rates will affect the amount of US dollars that you report for your foreign income.

Action: Use consistent and reliable sources for exchange rates.

Final Thoughts

Proper tax planning before you move abroad is essential. The goal is not only to stay compliant with IRS and state rules but also to reduce your tax liability and avoid unnecessary reporting burdens.

By making smart decisions about income exclusions, foreign bank accounts, investments, retirement accounts, and state residency, you’ll simplify your tax life and keep more of your hard-earned money.

Disclaimer: Tax laws are complex and subject to change. This blog is for informational purposes only and should not be considered tax advice. Consult with a qualified tax advisor specializing in US expat taxes for personalized guidance.