There are many concerns related to living abroad as US citizens, for example, last time we published a post on how to vote from overseas.
One of the most pressing concerns is personal finance. The US government has stringent regulations that impose heavy restrictions on how US citizens can handle their finances abroad. We’ll start by discussing the main regulations and then we’ll explore a few possible solutions.
Regulations
Global taxation
US citizens are taxed on global income regardless of where they live. This requirement is based on the idea that all citizens should contribute to the government’s funding, ensuring a consistent revenue stream.
The US also relies on reporting and taxing global income to prevent exploitation of tax havens and maintain fairness in the tax system.
Foreign held assets
The Foreign Account Tax Compliance Act (FATCA) enforces the reporting of foreign financial accounts and assets by US citizens living abroad.
Every foreign financial institution is subject to it and may decide to avoid accepting US persons as clients in order to avoid the high fines of not complying.
Moreover, if a US citizen owns foreign investment assets, they may be considered a Passive Foreign Investment Company (PFIC), primarily based on the passive income it generates or the percentage of its assets that produce passive income. Foreign mutual funds and ETFs definitely meet this criteria.
For U.S. taxpayers, including citizens living abroad, owning shares in a PFIC can have significant tax implications. Generally, U.S. taxpayers who own PFIC shares are subject to complex tax rules, including punitive taxation, designed to prevent the deferral of U.S. tax through investments in foreign mutual funds and similar investment vehicles.
Solutions
Banking
Our recommendations are to keep a US bank account, most major banks like Bank of America and Chase work very well with expats, you just need to change the address on file. They are useful for doing things like cashing a check from your tax refund.
Due to PFIC, most of your finances and investments need to be held in USD in a US broker. Open an account with a bank that offers low cost conversions from USD to your local currency. We recommend Wise, but there are alternatives, for example, Fineco in Italy is also great.
Investments
Due to PFIC, it’s a good idea to keep an account at a US broker, Vanguard seems open to keep accounts open for citizens living abroad. Otherwise the most open to this situation are: Interactive Brokers, Charles Schwab, and Alpaca.
Study how investments are taxed in your new country of residence, we wrote an article about this related to Italy. Depending on the country the are different rules, in most cases you will pay capital gain taxes in your country of residence and dividends will be taxable on both your country and the US.
PWC Tax Summaries website has good content about many countries, but we recommend speaking with a tax advisor because this is a very niche topic.
Retirement accounts
We wrote a whole blog post about these, typically you will stop contributing to US retirement accounts, and then you will use the retirement options provided by the new country of residence.
If you end up retiring abroad, you will receive Social Security and IRA withdrawals that will be taxable in your country of residence.
File your tax return
Last but not least, every year, make sure you file your US tax return. First, you should file in your country of residence, eventually submitting for an extension on the US one so that you can claim the foreign tax paid in your US return. Unless you live in a tax-advantaged country, you will not owe anything in the US.
In addition to filing your US tax return, US citizens living abroad must report any foreign bank accounts with a value exceeding $10,000 USD through the FBAR form. This form, known as the Foreign Bank Account Report, must be submitted annually via the official website. The deadline is usually around mid-April.
Spaghetti Finance 