In a recent Expat Focus webinar, Nathalie Goldstein of MyExpatTaxes and Tom Zachystal of IAM Advisors sat down to discuss tax and investing challenges for American expats in 2026.
The following transcript was generated by AI and may contain inaccuracies.
Hugo: Hello, everyone. Thank you for joining us today as we discuss US taxes and investing considerations for Americans abroad in 2026. Before we dive in, a brief disclaimer: this webinar is for informational purposes only and is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can only be given with a full understanding of each individual’s specific situation.
With that, let’s meet our panel. Tom Zackers is Founder and Chief Investment Officer at International Asset Management, a US Registered Investment Advisor specialising in discretionary investment management for Americans living abroad. Tom has an MBA in global management from Thunderbird University in Glendale, Arizona, and holds the Chartered Financial Analyst (CFA) credential and is a Certified Financial Planner (CFP) practitioner. Tom lives in the San Francisco area, having previously lived overseas in several different countries, and has been providing investment advisory services to American expats for over 20 years.
Nathalie Goldstein is an Enrolled Agent and co-founder of MyExpatTaxes, with a decade of experience helping Americans file their US taxes from abroad. Nathalie is a regular speaker on US expat taxes and regularly contributes to national US media. Originally from California, Nathalie now resides in Vienna, Austria, bringing personal insight into the challenges of living abroad to every expat situation.
So without further ado, over to you, Tom.
Tom: Thanks, Hugo. Let me just get my screen share going. Okay, hopefully that’s working.
So, a little bit about me: I’m usually based in the San Francisco area, although at the moment I’m in the mountains in a place called Bear Valley, so thankfully we have Starlink. I started International Asset Management in 2002. I was an expat myself — I worked as an engineer in the oil business for a company called Schlumberger across about a dozen countries before that. International Asset Management is what’s called a Registered Investment Advisor in the US, and we specialise in investment management and financial planning services for Americans living abroad.
90% of our clients are US expats, which is pretty rare these days — not a lot of American firms want to deal with non-US residents anymore. We have clients in about 30 countries, with about half in Europe. About three years ago we also started a business based out of Spain, which holds our European licence. So another thing that’s unique about us is that we have both a US and a European licence and clients all over the world.
Let’s have a look at what we’re going to cover. On the investment management side, we’ll look at what happened in 2025 and get a viewpoint on what might happen in 2026. First, we’ll keep things in perspective, because a lot has been going on politically and economically over the last year or so. Another theme that comes up a lot among our clients is the US dollar — it’s been weakening a bit, and if you’re living in Europe or somewhere else and spending money in another currency, that can feel concerning. I’ve got a little secret to share with you on that. We’ll also look at what investment analysts are saying about their expectations for markets going forward, including how to generate income from your portfolio, especially if you’re retired. And then some specific US expat issues we see come up regularly.
Tom: So let’s start with something that’s been in the news a lot: US interest rates — what we call the Fed funds rate, set by the Federal Reserve. Looking back to about 2007, the Fed tends to raise interest rates in an inflationary environment and lower them when the economy needs stimulating. There’s a lot of talk about how the Trump administration would like to see lower interest rates, but the Federal Reserve has a dual mandate: they have to worry about inflation, and they have to worry about keeping people employed. That’s a tough juggling act, but I think they’re doing a great job.
Where might rates go from here? This graph only goes back to 2007, but if we look at a longer-term graph going back to the 1970s, we’re actually about in the middle of the range on the Fed funds rate — so it could go up or it could go down. Employment is pretty good in the States and inflation has come down, though it went up a lot with the Russia-Ukraine situation. Still, it’s a K-shaped economy in the US: the rich keep getting richer and the poor keep getting poorer. My thinking is that interest rates will probably stay more or less the same in the US, and probably in Europe too, where they’re already a lot lower. I don’t think we can make strong investment bets on interest rate direction over the next year. One thing to note: when interest rates go down, that tends to be negative for the currency, because investor money flows to higher-yielding assets elsewhere.
So what have we seen in the US dollar recently? Definitely in 2025 we’ve seen a weakening trend. These lines show US dollar exchange rates with the euro, the pound, and others — up means the dollar is strengthening, down means weakening. The dollar weakened against most currencies last year, except the yen towards the latter half of the year and the Indian rupee, against which the dollar has actually been strengthening for many years. Against the major currencies, the dollar weakened over 10% — almost 12% against the euro, 7% versus the pound, and about 14–15% versus the Mexican peso. That trend has continued so far this year.
But what does this actually mean? Looking at the US dollar versus the euro over the last 50 years, the exchange rate is actually about in the middle of the historical range. There are outliers — like 1985 when the dollar strengthened a lot — but broadly we’re in the middle, and it could go either way. I expect a bit more US dollar weakening this year, though probably not as much as last year. Trump wants a weaker dollar policy, and if the economy slows, the Fed might have room to lower interest rates. So the trend is more in the downward direction for the dollar, but not dramatically so.
Tom: And here’s the secret I mentioned. A lot of people ask: if I’m spending money in euros, shouldn’t I convert everything to euros? But have a look at what happens when stock markets go down. This chart covers the 2008 financial crisis — from mid-2007 to the end of 2009. The blue line is the S&P 500, which at one point was down over 50%. The orange line is the US dollar versus the British pound, and the purple line is the euro exchange rate. You can clearly see that the dollar strengthens when investment markets go down.
This isn’t just a 2008 phenomenon. Here’s the 2020 COVID crisis — there was a big sell-off when COVID got into the news and the world started shutting down. You can see that sell-off in March 2020 where the S&P 500 plummeted about 30% in about a month, and the corresponding spikes in the US dollar as it strengthened. And in 2022, another down year — at one point the S&P 500 was down 25% — you can again see the dollar strengthening as the stock market weakened. At one point in 2022, the dollar was up 15% versus the euro while the market was down 25%, so in euros you’d have been down only about 10%.
This is a great trend to be aware of. If your investment account is going down because the stock market is falling, but the dollar is strengthening at the same time, you’re getting an offset in euros — a natural diversification benefit. It isn’t necessarily better to have all your money in your local currency, because you lose that hedge.
Tom: So what’s been going on in stock markets? Last year was a pretty good year — a good year everywhere, but especially outside the US. The pale blue line is the S&P 500, which was up 13%. You can see the dip in early April — Liberation Day, when Trump announced his tariffs — where stock markets plummeted, but they went back up. What’s clear is that non-US markets did much better. Interestingly, you’d think the tariffs would hurt those countries’ markets, but the opposite was true. The top performer was South Africa — mostly due to mining companies — followed by Mexico and Brazil. Emerging markets did especially well in the latter half of the year.
Year to date, the trend continues: the S&P 500 is about flat while most other markets, especially emerging markets and now Japan, are doing much better. This is a good advertisement for international diversification, particularly now, as investors broadly seem to think the tariffs will affect the US more than the targeted countries.
Another standout from last year was gold and commodities. Silver was up about 140% over the year; gold was up about 75%. Gold mining companies have also done well over the last year and a half. On the other side, Bitcoin was down about 30% and Solana was down over 50%, with most of those losses coming in October. Some diversification into alternative assets makes sense, but crypto is definitely not for the faint-hearted.
Tom: So what are the forecasts going forward? Wall Street analysts generally expect a decent year — they’re projecting the S&P 500 up about 10%, which is an average year for the US market historically. They’re also expecting equities outside the US to go up, though less strongly — about 6% for Europe. I’m not sure I agree with that; I actually think non-US markets might outperform, particularly emerging markets, because I see investors rotating money outside the US. Non-US markets are considerably cheaper, and there’s also concern about an AI bubble — the US market is about 35% technology, whereas European markets have very little technology. The UK market is practically zero technology.
The Magnificent Seven tech stocks have gone up a lot, and I don’t think they’ll have those kinds of returns this year. Our portfolios are currently about 50% or more on the non-US side. They can’t keep going up forever, and now these companies are spending heavily on AI without having seen the payback yet — and they’re very expensive relative to markets outside the US.
Looking at economic indicators: the leading economic indicator for the US is a composite of about 12 measures — including unemployment data and the stock market — and is supposed to foresee conditions about six months ahead. The coincident indicator measures current conditions. You can see the pattern in the chart: the leading indicator goes down before recessions arrive. We saw that in 2000 with the dot-com bust, in 2008 with the real estate crisis, and briefly in 2020 with COVID. Since 2022, the leading indicator has been declining, but we haven’t seen the coincident indicator turn yet — it’s starting to flatten, which is worth watching. The same pattern holds in Europe.
So we should be a little cautious — there are signs that a recession could be coming at some point. That said, I listen to earnings calls from about 50 different companies every quarter, and so far results have been good. People are still spending money; you can see cruise lines and travel companies doing well. The baby boomer generation is driving a lot of discretionary spending.
Tom: In summary: the analyst consensus is about a 10% rise in US stocks. Nobody really knows what effect Trump’s policies will have — they change frequently, which makes it hard to invest around them — but those policies are probably going to have a bigger effect on the US than on other countries. Europe has lower economic growth; China has been in the middle of a real estate crisis for years, similar to the US in 2008. So the US is doing okay, but there are concerns about US technology company valuations after their big run-up. It might be a good time to take some profits there if you can. A recession could be six months to a year away, so we should watch for negative changes in earnings going forward.
For now, things are broadly stable. In that kind of environment, income investments become more attractive — it might make sense to orient the portfolio a bit less towards growth and more towards income. And as we’ve discussed, a balanced approach to currency diversification is generally better than having everything in one currency.
In terms of income investments, it doesn’t have to be just bonds — dividend-paying stocks, preferred shares, Real Estate Investment Trusts (REITs), and Business Development Companies (BDCs) all have yields roughly in the 6–10% range and can offer good portfolio diversification.
Just briefly on a few expat-specific issues: some people have trouble using a local address on an investment account — look at Charles Schwab or Interactive Brokers, two US custodians that are good at dealing with expats and don’t require a local address in most parts of the world. That’s what we use to hold client accounts. Be careful about advice that works in the US but doesn’t translate abroad — for example, doing a Roth conversion when you’re in a lower tax bracket, when the Roth account might not be recognised in your country of residency as a tax-deferred account. For currency conversions, it’s worth using a service like Wise rather than going through your bank, where rates tend to be poor.
If you want to hold investments outside the US — say in euros — stick to cash products like term deposits or high-yield savings accounts, because you don’t want to get into PFIC issues. US mutual funds aren’t available to non-US residents, and municipal bonds are rarely useful because the tax benefits don’t necessarily apply when you’re abroad. Taxable bonds at a higher interest rate are probably the better option. Feel free to reach out if you’d like to discuss any of these in more depth.
I’ll now pass back to Hugo.
Hugo: Thank you, Tom. Excellent presentation. Nathalie, shall we move on to taxes?
Nathalie: Yes, let’s go. Let me share my slides.
So let’s talk about US taxes. I know taxes aren’t as fun as investing — investing is always the exciting side of personal finance — but it’s the side you have to deal with. I get it personally: I’ve been living in Austria for 10 years, having previously been in California like Tom. Managing your finances locally while also managing them in the US can be a lot.
Here’s what we’ll cover: what you need to know for this upcoming tax year, some tax-saving good news, why you have to file a US tax return at all, what happens if you haven’t filed and need to catch up, and the FBAR and FATCA reporting that comes alongside your tax return.
Nathalie: First, the filing deadlines. If you’re living in the US, you know the date: April 15th — that’s when payments are due and when you’d need to file. As an expat it’s a little different. If you’re not in the US on April 15th, you can delay your filing by two months automatically — but don’t assume it’s entirely automatic. You need to use expat-focused tax software or a firm like MyExpatTaxes, because if you file without the statement identifying yourself as an expat, the IRS won’t know you qualify for that two-month extension.
And even if you can wait until June 15th to file, if you owe taxes, you still have to pay by April 15th — otherwise there are interest and penalties. So if you think you might owe taxes, we always recommend filing by April 15th, or at least going to myexpattaxes.com to model your return and see whether you owe or can wait a bit longer.
If June 15th still isn’t enough time — maybe you’re waiting for local tax statements, or you have a business abroad — you can file for an extension until October 15th using Form 4868. You can do this electronically through MyExpatTaxes and get immediate confirmation. That extension request has to be submitted by your filing due date — so by June 15th for expats. This is very common for people with foreign limited liability companies set up in the UK, the Netherlands, Singapore, and similar, where you simply don’t yet have the financial statements you need.
If October 15th still isn’t workable, you can write a letter to the IRS requesting an extension until December 15th — MyExpatTaxes can help with that letter. We only recommend this when truly necessary, as it’s a cumbersome process and the IRS won’t confirm the extension; they’ll only notify you months later if they’ve rejected it. If you can stick to October 15th, do.
And if you haven’t been filing at all, file sooner rather than later. For most expats, taxes aren’t actually due, but if you do owe anything, the sooner you file the fewer penalties you’ll face.
Nathalie: So who actually needs to file? All US citizens and green card holders who pass the filing thresholds. You need to look at your worldwide income — not just US income, but everything: wages in the US, the UK, Japan, wherever, whether it’s salary, pension, rental, or interest income — and check whether your combined total exceeds the filing thresholds shown on screen. Those thresholds are normally aligned with your standard deduction, which increases every year.
You’ll notice two very low numbers on screen, and that’s not a typo. The US is particularly strict for people who are either married filing separately or self-employed. If you’re married to a non-US citizen who doesn’t want to be included on your tax return, you’re generally stuck with married filing separately — and that threshold has been as low as $5 since 2018. So even if just your bank interest went over $5, you have to file.
If you’re self-employed, regardless of filing status, if your net self-employment income is over $400 you also have to file — because the IRS needs to assess whether you’re subject to self-employment tax at 15.3%. So there are two types of tax to be aware of: income taxes, and social security taxes in the form of self-employment taxes.
Nathalie: Now for the good news. Every year the standard deduction increases, meaning more income is potentially tax-free. Here’s an example: say you make the equivalent of $100,000 in foreign wages and you also have $10,000 of capital gains from US brokerage accounts. If you use the FEIE, you could exclude your $100,000 in foreign wages, leaving only $10,000 of taxable income — and then the standard deduction brings that to zero. Filing as an expat can actually be very advantageous, especially if you have US investment income.
Tax brackets continue to increase while rates stay the same. If you tend to owe US taxes because of US-sourced income, this means more of your money is taxed at a lower rate. The Foreign Earned Income Exclusion — the FEIE, Form 2555 — also increases year to year. For 2025, it increased from $126,500 to $130,000, so that’s a significant amount of foreign income you can exclude from US taxation.
Another benefit many people don’t know about is the Additional Child Tax Credit — a refundable credit. If you have children who are US citizens with a valid Social Security Number and are under 17, you may be eligible to receive $1,700 per child as a refund each year, even if you pay no US tax and even if you live abroad. So filing a US tax return isn’t just a paperwork exercise — there are real financial benefits, especially if you have US investment income or children.
Nathalie: On IRA contributions: you can contribute to an Individual Retirement Account as an expat — $7,000 per year, or $8,000 if you’re over 50, for the 2025 tax year. You can still contribute up to April 15th of this year. Just keep in mind you need taxable compensation to contribute, and there are income limits depending on whether you’re contributing to a traditional or Roth IRA. If you’re already in retirement, don’t forget Required Minimum Distributions — if you’re not taking them, you could be subject to additional tax. If you’ve missed a few, file your tax return with a statement of reasonable cause and you can generally get that penalty waived. Talk to your financial advisor about RMDs so you can start pulling that money out.
On IRS Direct Free File: US expats are still waiting for it, and we’ll probably continue waiting for a few more years. You may also have heard about Trump Accounts — new IRA-style accounts you can elect to open on your 2025 tax return for children under 18. There’s still limited information available, but they should function similarly to traditional IRAs, except your children don’t need earned income for you to contribute. That could be an attractive option if you’re looking to build investment accounts for your children.
Nathalie: So why don’t most expats owe US taxes? Generally because of three benefits.
The first is the FEIE — Form 2555 — which excludes up to $130,000 of foreign earned income from US taxation. Two key words here: the income must be earned (salary, self-employment, active partnership income — not rental, investment, or pension income), and it must be foreign-sourced, meaning you must have physically worked outside the US to earn it.
For example: if you work for a US employer that sends you to Spain for a year, paying you via W-2 in USD to a US bank account — that’s still foreign earned income, because you physically worked outside the US. It doesn’t matter that it was a US employer, a US bank account, or USD. Flip it around: if you work for a German employer but they send you to the US for a month, that month’s income is US-sourced and cannot be excluded under the FEIE — even if it’s paid in euros to a German bank account.
A couple of important cons to the FEIE: if you use it, you cannot claim the Additional Child Tax Credit. Also, if you exclude all your foreign wages, you may have no taxable compensation left, which means you can’t contribute to an IRA.
Nathalie: That’s why we actually prefer the Foreign Tax Credit approach where possible — particularly for people living in countries with income taxes higher than the US rate. If you use MyExpatTaxes, we model your return under both approaches and show you which is better and why, regardless of which plan you’re on.
The Foreign Tax Credit has real advantages. You get carryovers — up to 10 years of unused income tax credits. For example, if you’re a salaried person paying a lot of income tax in the UK, you accumulate a large bucket of unused foreign tax credits. When you retire and take a lump-sum pension payment that isn’t heavily taxed locally, you can draw on those credits. You can also still claim the Additional Child Tax Credit, and because you’re not excluding income from taxation, you retain taxable compensation to contribute to an IRA.
The Foreign Tax Credit is more complex, though. There are different buckets on Form 1116 — general income, passive income, and others — and you can’t transfer credits between them. So it’s really important to use tax software or a firm that understands how sourcing and categorisation works.
The third benefit is tax treaties. Most people get excited when they see a long tax treaty with a country like France covering capital gains and interest income — but almost every tax treaty has a savings clause, which essentially says: if you’re a US citizen, you can’t use 99% of this treaty. There’s usually just one small carve-out paragraph that’s exempt from the savings clause. Where tax treaties are genuinely useful is for government-funded social security or pension income — the treaty may assign taxing rights to just one country, and that provision is generally exempt from the savings clause.
Nathalie: Now let me narrow in on self-employment, since that’s where I get the most questions.
If you’re a digital nomad — moving around, self-employed, not registered in any country — you’re probably using the FEIE because you don’t have foreign income taxes to claim. However, because you’re not registered in any other country and you’re self-employed, you’re likely subject to self-employment tax at 15.3% of your net self-employment profit. So even if you owe no income tax through the FEIE, expect to pay 15.3% in social security and Medicare taxes. If this is your situation, please file by April 15th — you probably owe US taxes.
If you’re a freelancer registered in a country like the UK, Germany, Austria, France, Japan, or South Korea — reporting your income locally and paying taxes there — you can use the FEIE or the Foreign Tax Credit and likely end up paying zero income taxes. You may also be able to use a Totalization Agreement. There are fewer of these than there are tax treaties, but if one exists between the US and your country of residence, it can mean you only pay self-employment and social security taxes locally, not to the US as well. Most of the EU and the UK are covered. In Asia, Japan and South Korea generally have agreements. In South America, Chile is one of the few. Australia has one; New Zealand doesn’t, which surprises many people. If there’s no Totalization Agreement, file by April 15th — you may owe 15.3%.
Nathalie: If you’re a business owner, complexity increases further. Setting up a company abroad can trigger a range of US foreign corporate reporting forms — Form 5471 or Form 8865, and the list goes on. I know that sounds alarming when you Google it, but it’s manageable. You’d use the FEIE or Foreign Tax Credit on your salary, and the Foreign Tax Credit on your dividend income. You’re generally not considered self-employed on Schedule C because you’re paying yourself a salary.
You do need to file Form 5471 if you have a foreign corporation with limited liability owned more than 50% by US citizens, as it may be subject to GILTI (Global Intangible Low-Taxed Income) taxation — where the company’s net profit is taxed at ordinary income tax rates. However, there are ways to reduce or eliminate this through the GILTI high-tax exclusion or the Section 962 election. More complex, yes — but not the end of the world.
PFIC issues also factor into this picture, and I’ll address those properly in a moment.
On self-employment tax generally: it’s a social security and Medicare tax at about 15.3% of your net self-employment profit. With a Totalization Agreement you can get an exemption. Without one, you’re stuck with the bill. Some people set up a foreign corporation specifically to avoid it — and then file the relevant corporate forms instead. It’s not all bad though: paying self-employment tax means you’re contributing to your US Social Security benefits. If you accumulate 40 credits (a maximum of four per year), the US will pay you Social Security benefits when you retire. Some people actually opt in even when they don’t have to, for exactly this reason.
Nathalie: On the child tax credit in more detail: there are two components. The first is generally non-refundable — it reduces your US tax bill. The second portion is refundable, meaning it can result in an actual cash refund even if you owe no taxes. To receive that refund, you need earned income of more than $2,500 — worldwide wages, US and foreign, though foreign self-employment income may not count if you’ve used a Totalization Agreement to exempt yourself from self-employment tax. Once you have earned income over $2,500, subtract $2,500, multiply by 15%, and you get a refundable credit of up to $1,700 per eligible child. There are income limits: if your modified adjusted gross income exceeds $200,000 (for most filing statuses outside married filing jointly), that refundable amount may be phased out.
Nathalie: On top of your income tax return, there are additional reporting requirements — and this is where FBAR and FATCA come in. This is also part of why it can be difficult to open bank or investment accounts in Europe as a US citizen: financial institutions face significant compliance burdens under FATCA, as they’re required to report their US clients’ information to the US authorities. That’s why you’ve had to provide your Social Security Number to a French bank — it’s required under FATCA.
If you have a combined maximum balance across all your foreign financial accounts — bank accounts, investment accounts, pension accounts with a cash value, life insurance policies with a cash value — of over $10,000 at any point during the year, you have to report all of your accounts on the FBAR (FinCEN Form 114), even accounts that individually didn’t exceed the threshold. The FBAR is filed electronically through the Financial Crimes Enforcement Network, separately from your tax return.
If your combined maximum balance is even higher, you may also need to file Form 8938 — the FATCA form — which is included with your tax return and covers the same information plus some additional questions. Importantly, there is no additional tax calculated on the amounts in your bank accounts. This is purely informational reporting — your income is taxed, not the cash sitting in your accounts. There are, however, penalties for not filing the FBAR, so that’s the one area where non-compliance can result in financial consequences.
Nathalie: If you’re listening to this and thinking you haven’t filed — don’t panic. There’s an IRS amnesty programme specifically for expats called the Streamlined Filing Compliance Procedures. Even if you haven’t filed for 10 or 30 years, all you need to do is file your three most recent back years of tax returns and your six most recent back years of FBARs. That’s the Streamlined package, plus your current year to stay in good standing. Any refunds you’re owed — from children’s credits or withheld taxes — you will receive. And interestingly, if you file late and you were owed a refund, the IRS will pay you interest on top of that refund.
The Streamlined procedure waives all late filing penalties. If you owe interest on unpaid taxes, that still applies, but all other penalties are waived. MyExpatTaxes supports the Streamlined procedure. And even if you’ve filed in the past but missed forms for foreign corporations, foreign mutual funds, foreign trusts, or FBARs, this procedure can also be used to amend prior returns.
I’ll hand it back to Hugo now.
Hugo: Nathalie, thanks so much — excellent presentation on taxes for expats. Let’s dive into some questions. Lots of you sent in questions when you registered, and there are quite a few. I’ll pick the ones most relevant to the broadest group of people. If we don’t get to yours, get in touch directly with Nathalie at MyExpatTaxes — email them at [email protected] — or contact Tom via iamadvisors.com.
So, first question: there’s an American expat in Poland who’s been unable to open an investment account there as a US citizen. They’re asking whether this is due to bank rules or some kind of international treaty, and why they can have a regular bank account but not an investment account. What are their options?
Tom: A lot of it has to do with FATCA reporting. There’s likely a FATCA agreement with Poland, meaning financial institutions there would have to report accounts held by US citizens to the US Treasury. This is generally more burdensome for brokerages than for banks, which is probably why the distinction exists. There are also Know Your Client (KYC) rules in the brokerage world — that’s part of why some US brokerage firms don’t want to deal with Americans living abroad either.
That said, you do have options. Charles Schwab and Interactive Brokers are the two custodians we use and both are good at dealing with expats. Interactive Brokers will deal with Americans living just about anywhere. If you live in Europe and open an individual or joint account with Interactive Brokers, it’s actually held in Ireland (or potentially Luxembourg), so those are technically Irish accounts, which avoids a number of issues. Charles Schwab is pretty good too, but doesn’t deal with every country — Italy, South Africa, the Philippines, and New Zealand are among the exceptions, but most other countries are fine.
Hugo: A tax question: as an expat receiving a foreign pension, how would that be reported or taxed by the US?
Nathalie: It depends on the type of pension. We’re generally looking at whether it’s government-funded social security or a company or private pension. If it’s government-funded, you look at the relevant tax treaty. Most treaties say that if it’s a social security-funded pension, only one country can tax it — either the US or the country of residence. Government pensions are generally exempt from the savings clause, so a US citizen can actually use that treaty benefit.
For any other type of pension — company or private — the savings clause generally applies, so you’d typically report the full amount on your US tax return and use any local income taxes paid to offset it via the Foreign Tax Credit. Pension income normally falls into the general bucket on Form 1116 — the same bucket as salary. So if you’re heading towards retirement and expect a large pension payment that won’t be heavily taxed locally, it’s worth building up foreign tax credits from your salary years to apply later.
Hugo: PFICs come up in quite a few of the questions. Tom, can you briefly explain what PFICs are and why they’re an issue for expats, and then Nathalie can address the tax side?
Tom: PFIC stands for Passive Foreign Investment Company. The fact that the name is that long is probably a sign it’s going to be a tax problem. For investment purposes, a non-US mutual fund and most non-US exchange-traded funds would qualify as PFICs — they’re considered passive because they’re not an operating business for you. What isn’t a PFIC? Cash products — money in a savings account earning interest, a term deposit, or a high-yield savings account. Individual stocks and bonds are also not PFICs. So you can hold those types of foreign investments without triggering PFIC rules.
Nathalie: On the tax side: PFICs are taxed differently from standard investments. With normal US mutual funds or ETFs, you’d report dividends and capital gains directly on your US tax return. With PFICs, you have to file Form 8621 for each individual fund. If you don’t make a specific election at the time of purchase, it defaults to Section 1291 taxation — meaning any excess distributions are taxed at the highest income tax rate, currently about 37%, plus potential interest charges. It can effectively wipe out any gains you have.
That said, PFICs aren’t all bad if you plan carefully. There are elections you can make. In Canada, for example, many funds have a PFIC Annual Information Statement, which means you can elect them as a Qualifying Electing Fund (QEF) and get taxation more in line with standard US capital gains treatment. That’s not available for all funds, but a mark-to-market election is available for everything. That means at the time of purchase you check a box on Form 8621 electing that each year you’ll report the unrealised gain or loss, taxed at ordinary income tax rates. For funds that aren’t highly volatile, that unrealised gain is often small enough to be covered by your standard deduction, so you may not effectively see a PFIC tax.
The main takeaway is: if you have a lot of foreign mutual funds — say 10 or 20, because a robo-adviser or an uninformed financial adviser put you there — it’s going to be a nasty surprise on your US tax bill. Every fund needs its own Form 8621, and the preparation fees stack up fast. If you’re going to hold PFICs, pick one, two, or three funds — easy to manage, easy to handle. Don’t invest in 30, because the preparation costs alone will offset your returns. If you’re already in that situation, don’t stress too much — we can work out how to make your return as simple and optimised as possible.
Hugo: A retirement planning question: a dual citizen living and working with her US citizen husband in Germany — how should they plan for retirement and save as expats, whether they eventually move back to the US or stay in Germany?
Tom: Before I answer that, one more point on PFICs: they work in reverse too. In the UK, there’s a concept of reporting and non-reporting funds, and US funds you hold may be treated as the equivalent of PFICs by your country of residence. Be aware of that in the UK, Austria, and other places.
On retirement planning: in the US, we’re used to 401(k) plans, IRAs, Roths, and so on. Some of these you may still be able to access as an expat, depending on your taxable income and how much you’re excluding under the FEIE. But it’s probably going to be considerably less than you could put into a 401(k) in the US. There’s nothing wrong with getting into the local pension system. In Europe, they have a three-pillar system: public pensions, private pensions, and your own savings. Most employers offer some kind of pension scheme, and if you’re going to be there for a number of years, it’s worth participating — you can effectively treat it as a retirement account you’ll access at some point.
Otherwise, your options are fairly limited: you may be able to contribute to an IRA if you don’t exclude all your income, and beyond that, a regular savings plan into a bank or brokerage account. And don’t forget — you can have tax deferral even in a regular brokerage account, because you don’t pay capital gains tax until you sell. A buy-and-hold philosophy gives you a form of tax deferral as well.
Hugo: Here’s one where one spouse is a US citizen and the other is a non-US citizen, and both are collecting US Social Security. The non-citizen spouse’s only US income is that Social Security. What are the tax filing implications?
Nathalie: It depends on whether they have any other income. If the non-US citizen only has US Social Security benefits, depending on the country and any applicable tax treaty, it might not even be taxable. Whether they even have to file a US tax return really depends on the treaty and their overall situation.
If you are married, you could elect to file jointly. If the US citizen has a filing requirement and might owe tax, it may actually make sense to file jointly — you’d elect to include the non-US spouse on the return, file a paper joint return, and submit an ITIN application at the same time. Filing jointly might improve the overall tax situation for both. But if both spouses only have US Social Security income and no other significant income, they may not need to file at all, depending on the tax treaty of their country of residence.
Hugo: Tom, someone asks: is it best to move US brokerage investments to a brokerage in Canada when they move there? I suppose this applies to any country.
Tom: We don’t deal with Canada specifically — if the client lives there, the adviser has to be licensed in Canada and we’re not, though I’m Canadian myself. But broadly, on moving assets to another country: certain things can’t be moved, like US retirement accounts — those have to remain as US accounts. A US grantor trust will also likely need to stay in the US. But a regular investment brokerage account? In principle, yes, you can move it. You may need to liquidate investments and transfer cash, which could trigger capital gains. And then beware what you invest in once you’re there: as a US citizen with a foreign brokerage account, you’d want to avoid non-US mutual funds due to PFIC rules — and in many parts of the world, investment products are still heavily mutual fund-based.
Hugo: And are there good reasons to do it, or not particularly?
Tom: The US is a very competitive marketplace — fees tend to be lower and there’s a broad range of products. Advisers in another country tend to be locally focused; a UK-based adviser, for example, will typically invest more heavily in the UK even though the UK is only about 6% of the global market. For US citizens, I’d generally say it’s better to keep your investment dollars in the US. That said, if there’s someone you trust in Canada and you’d be able to contribute to tax-deferred accounts like RRSPs or RESPs there, then there would certainly be benefits to that.
Hugo: Nathalie, a final question: later this year, stocks from a non-US company will vest for the first time for one of our attendees. What are the tax reporting requirements and implications?
Nathalie: It’s actually quite similar to vesting from a US company. When Restricted Stock Units (RSUs) vest, the vested amount is generally treated as compensation — salary — for that period. In the US this is typically included in your W-2, but that may not be the case with a local payroll abroad. So if your payroll does not include the vested amount as salary, you need to add it yourself on your US tax return.
When you go to sell those stocks, that’s a separate taxable event. You’d look at whether you have a gain or loss against the vesting amount — since you’ve already been taxed on the vesting amount, that becomes your cost basis. Typically when stocks vest, a portion is withheld to cover taxes, which counts as compensation. When you sell, any gain or loss against that cost basis would be reported as a capital gain or loss on Form 8949 / Schedule D.
Hugo: Thank you very much. I’m afraid that’s all we have time for today. Thanks to our panellists for the presentations and to all of you for joining us. If you have further questions or want to discuss your situation, head to expatfocus.com and under Services in the top navigation, go to either US Tax Returns or US Citizens Financial Planning. Thanks again, and we wish you a very pleasant rest of your day.