International Tax for US Persons: FBAR, FATCA, FEIE, and the Rules Most Preparers Get Wrong

A US person is a US citizen (regardless of residence), a green card holder, or a resident under the substantial presence test (more than 183 days using the weighted formula in IRC Section 7701(b)). US persons are taxed on worldwide income, file Form 1040, and have full FBAR and FATCA reporting obligations.

Non-resident aliens file Form 1040-NR and are taxed only on US-source income and effectively connected income from a US trade or business. Closer connection exception (Form 8840) and tax treaty tie-breakers can preserve non-resident status even when the substantial presence test is technically met.

The Foreign Earned Income Exclusion (FEIE) under IRC Section 911 lets qualifying expats exclude up to $130,000 of foreign earned income from US tax in 2026 (indexed annually). Combined with the foreign housing exclusion, the total can reach $160,000+ depending on the location.

Qualification requires either the bona fide residence test (an entire tax year as a bona fide resident of a foreign country) or the physical presence test (330 full days in any 12-month period in foreign countries). Foreign earned income means wages and self-employment income for services performed abroad. It does not include passive income, US-source income, or income paid by the US government.

FEIE is elected on Form 2555, attached to Form 1040. It is a use-it-or-lose-it election in the sense that a revocation requires IRS consent for 5 years. For self-employed expats, FEIE excludes income from regular income tax but does not exclude self-employment tax (15.3% on net SE income), unless a totalization agreement applies between the US and the foreign country.

The Foreign Tax Credit (FTC) under IRC Section 901 provides a dollar-for-dollar credit against US tax for income taxes paid to foreign countries. It is filed on Form 1116 and applies to all categories of foreign income, not just earned income.

For expats living in countries with higher tax rates than the US (much of Western Europe, Australia, Canada), FTC often exceeds FEIE because the foreign tax paid is high enough to offset all US tax owed. It also preserves earned income for IRA contributions, child tax credit, and other benefits that FEIE eliminates.

A common optimization is to claim FTC instead of FEIE for high-tax-country expats, or to claim FEIE up to the limit and FTC on the excess. Stacking strategies require running both calculations.

FBAR (FinCEN 114) is a Treasury Department report required of any US person with a financial interest in or signature authority over foreign financial accounts whose aggregate value exceeded $10,000 at any time during the year. It is filed online through FinCEN, separate from the tax return, due April 15 with an automatic October 15 extension.

Foreign accounts include bank accounts, brokerage accounts, mutual funds, certain insurance products, and certain pension and retirement accounts (a UK SIPP, an Australian Super, etc.). The $10,000 threshold is aggregate across all accounts, not per account.

Penalties for non-willful FBAR violations are up to $10,000 per violation per year (post-Bittner Supreme Court ruling: per form, not per account, for non-willful). Willful penalties are up to 50% of the balance or $100,000, whichever is greater. Streamlined procedures and the Delinquent FBAR Submission Procedures provide ways to come into compliance without willful penalties for non-willful taxpayers.

Form 8938 (FATCA) is filed with Form 1040 by US persons with specified foreign financial assets above filing thresholds: $50,000 single / $100,000 joint at year-end (or $75,000 / $150,000 at any time during the year). For expats, thresholds are higher: $200,000 / $400,000 at year-end.

FATCA covers a broader set of assets than FBAR: foreign stock and securities held directly, interests in foreign partnerships, and certain foreign retirement accounts that FBAR may not capture. The two reports overlap heavily but are not duplicative. Most US persons with foreign assets must file both.

A US shareholder (10%+ owner) of a Controlled Foreign Corporation (CFC) is subject to immediate US tax on certain categories of foreign income, even if not distributed. Subpart F (under IRC Section 951) targets passive income (interest, dividends, rents, royalties) and certain related-party sales income.

GILTI (Global Intangible Low-Taxed Income, IRC Section 951A) was added by the 2017 Tax Cuts and Jobs Act. It captures most foreign earnings above a 10% return on tangible assets, taxed at a reduced effective rate (after the Section 250 deduction) of around 10.5% for C-corp shareholders. Individual US shareholders pay GILTI at full ordinary rates and cannot directly use the Section 250 deduction or foreign tax credit, although a Section 962 election allows individuals to be taxed as if they were corporations on GILTI.

Form 5471 reports the CFC ownership and is required even with no GILTI or Subpart F inclusion. Penalty for failure to file Form 5471 is $10,000 per form per year, plus loss of foreign tax credits.

A foreign-domiciled mutual fund or ETF is almost always a Passive Foreign Investment Company (PFIC) under IRC Section 1297. The default tax regime (Section 1291) treats gains and excess distributions as ordinary income, taxed at the highest rate in effect for each year of the holding period, plus an interest charge for deferral. The result is brutal effective rates, often above 50%.

Two elections soften the result. The Qualified Electing Fund (QEF) election under Section 1295 treats the PFIC like a US mutual fund (current-year inclusion of ordinary and capital gain shares, and elected information from the fund). The Mark-to-Market election under Section 1296 marks the PFIC to fair value annually, with gains taxed as ordinary income.

Form 8621 reports PFIC status and elections. The strong preference for US-domiciled funds (held in a US-based IRA, 401(k), or brokerage) is the simplest way to avoid the issue entirely. For US persons abroad, this often means structuring foreign retirement accounts and brokerage accounts carefully.

A "covered expatriate" (US citizen relinquishing citizenship or long-term green card holder ending residency) under IRC Section 877A faces an exit tax: a deemed sale of all worldwide assets at fair market value on the day before expatriation. The 2026 exclusion amount is around $890,000 (indexed). Above the exclusion, gain is recognized and taxed.

You become a covered expatriate by hitting any of three tests: net worth over $2 million, average annual net income tax over the threshold for the prior 5 years, or failure to certify 5 years of tax compliance on Form 8854. The exit tax also affects deferred compensation, IRAs, and certain trusts under separate rules.