US Expat Investing | A Complete Guide
This article is intended for US expats investing outside of the United States, and aims to provide clear and concise information to ensure compliance with US tax laws and reporting,
Investing As A US Expat
Navigating investments as a US expat can be particularly challenging due to the complex tax rules and reporting requirements imposed by the IRS on US citizens and US connected persons. These regulations can make it difficult for Americans living abroad to access international investment opportunities.
From extensive paperwork and potential penalties to higher taxes on certain investments and even restrictions on the types of investments that Americans abroad are allowed to hold, the obstacles can feel overwhelming. In fact, some international investment firms won’t accept US clients at all due to strict compliance and reporting regulations.
Despite these hurdles, there are still viable foreign investment solutions available. With the right advice and specialist support, US expats can successfully navigate these complexities and step into the global investment market.
Our guide explores the key rules US persons need to be aware of and outlines the tax reliefs and investment options available to those living overseas.
What Is A US Connected Person?
Being a US citizen or connected person comes with a unique set of challenges when investing abroad, and relocating outside of the United States does not automatically remove your tax obligations. Even if you’ve become a resident of another country, the IRS may still consider you a "US connected person." This status applies not only to US citizens and green card holders, but also to individuals born abroad with a US citizen parent, naturalised citizens, US tax residents, and even US-based entities such as corporations, LLCs, and trusts. Critically, it also includes expats who have lived outside the US for many years.
Regardless of whether you owe any tax, US connected persons are generally required to file an annual tax return with the IRS. Failure to comply with these strict regulations can result in hefty penalties and fines, so it’s vital to remain fully tax compliant.
Unfortunately, this status can also limit your access to certain foreign investment services or financial institutions, many of which may not take on US clients due to the burden of IRS reporting requirements.
The only way to fully shed your status as a US connected person is by formally renouncing your U.S. citizenship or giving up your green card or US tax residency. This is a complex, often irreversible decision which comes with significant consequences, such as renunciation fees and potential exit taxes, and expert guidance is essential if you’re considering this route.
IRS Reporting Rules for US Connected Persons
The IRS imposes stringent reporting rules when it comes to foreign assets and investments, and failing to comply can result in hefty penalties. Some reporting requirements to be aware of include:
FBAR (Foreign Bank Account Report)
The Foreign Bank Account Report (FBAR) was introduced by the US tax system in the 1970s as part of the Bank Secrecy Act, in an effort to prevent tax evasion and monitor offshore accounts.
Under FBAR tax reporting rules, any US citizen or connected person who holds one or more foreign financial accounts, such as bank accounts, that collectively exceed $10,000 at any point during the calendar year is required to declare these to the IRS. To stay compliant, you must submit the online form known as FinCEN 114 each year.
Failing to file this form can result in steep penalties, with fines reaching up to $10,000 per unreported account, per year.
FATCA (Foreign Account Tax Compliance Act)
To further combat tax evasion, the Foreign Account Tax Compliance Act (FATCA) was introduced in 2010. This legislation significantly expanded the reporting obligations for US citizens and US connected persons. In addition to filing Form 8938 (Statement of Specified Foreign Financial Assets), which is required for anyone holding substantial foreign assets and comes with severe penalties for non-compliance.
FATCA also places reporting responsibilities on foreign financial institutions (FFIs), which are now required to disclose information directly to the IRS about any accounts held by US persons. As a result, many overseas banks and investment platforms have chosen to stop working with US clients altogether, closing accounts or refusing new business to avoid the administrative burden and risk of non-compliance. This has significantly reduced financial privacy for US expats and made it much harder to access international investment opportunities.
PFICs (Passive Foreign Investment Companies)
The regulations surrounding Passive Foreign Investment Companies (PFICs) add yet another layer of legislation intended to deter US connected persons from investing abroad. These rules target individuals who invest in non-US companies, or other investments such as foreign mutual funds, exchange traded funds, insurance products or wrappers, stocks, and trusts.
A foreign company may be classified as a PFIC if it meets either of two criteria: the income test (where over 75% of its income is considered passive, such as dividends, interest, or capital gains) or the asset test (where over 50% of its assets generate passive income). If an investment qualifies as a PFIC, it’s subject to especially punitive tax treatment. Not only are gains taxed at the highest marginal income tax rate (currently up to 37%), but the IRS may also impose interest penalties.
Furthermore, investors must file Form 8621 for each PFIC every year, which is notoriously time consuming to complete and often requires the assistance of tax professionals. For US expats, it's essential to understand and identify PFICs to avoid unexpected tax bills, administrative burdens, and harsh penalties.
Tax Reliefs Available To US Citizens
Whilst investing abroad is certainly fraught with complexity, there are some tax reliefs and useful schemes available to US persons, including:
Foreign Earned Income Exclusion (FEIE)
This is a tax exclusion which allows American expats and taxpayers living and working abroad to exclude a portion of their foreign income from US income tax. For the 2024 tax year, the exclusion limit is up to $126,500 per person.
To qualify, your main place of work or business must be outside the US, and you must meet one of two residency tests: the Bona Fide Residence Test, which applies if you've been a resident of a foreign country for a full calendar year or more; or the Physical Presence Test, which requires that you be physically present in a foreign country for at least 330 full days within a 12-month period.
It’s important to note that this exclusion applies only to earned income such as wages or income from self-employment and not passive income like dividends or rental income. To claim the FEIE, you’ll need to file Form 2555 with your IRS filing.
Foreign Tax Credits (FTC) For US Expats
US expats living and earning abroad may be able to use Foreign Tax Credits (FTCs) to reduce their overall tax liability. If you’ve already paid income tax in the country where you live and work, the US allows you to claim a dollar-for-dollar credit on those foreign taxes against your US tax bill for the same income.
To qualify, the income must be foreign-sourced, and you cannot claim the Foreign Earned Income Exclusion (FEIE) on the same income.
Double Taxation Agreements
Double Taxation Agreements (DTAs), also known as tax treaties, are designed to protect you from being taxed twice on the same income if you're a US citizen living abroad. These agreements outline which country has the primary right to tax specific types of income (such as employment earnings, capital gains, or inheritance) and can help ensure you're not overpaying in tax. Seeking guidance from a cross-border financial adviser can help you interpret and apply these treaties correctly.
Which International Investments Are Available To US Expats?
For US expats intending to invest internationally, it’s essential to tread carefully, especially when it comes to avoiding investments that could be classified as PFICs.
Fortunately, solutions such as Global Investment Accounts or Qualifying Electing Funds can help mitigate these risks, and working with the right independent financial adviser can open the door to compliant international investment platforms and opportunities.
Most importantly, partnering with a specialist who understands the unique tax laws for US persons living abroad ensures you stay on the right side of IRS regulations.
Investment Advice For US Expats
There’s no denying that navigating foreign investments as a US expat is particularly difficult, but with the support of a specialist cross-border financial adviser, you can still take full advantage of international investment opportunities while staying compliant with US tax laws and avoiding unwanted penalties.
