Tax consideration for US executives: Moving abroad doesn’t mean leaving taxes behind

Worldwide income and foreign tax relief

US citizens remain taxable on worldwide income no matter where they live, including salary, bonuses, investment income, and employer-paid allowances. Some executives may qualify for the foreign earned income exclusion (FEIE) of approximately USD 130,000 per tax year under IRC Section 911, which can exclude a limited amount of earned income if they meet the foreign tax home and residency or physical presence requirements. A separate housing exclusion may also apply in some cases.

The FEIE does not apply to investment income, capital gains, deferred compensation, stock options, or RSUs. These can create complicated sourcing, timing, and double-taxation issues. If the FEIE is not elected, or income exceeds the exclusion, foreign tax credits may help offset US tax on income also taxed abroad, subject to limitations.

If you do not elect the FEIE – or have income exceeding the FEIE – you may be able to claim foreign tax credits. 

Reporting compliance and state residency 

Foreign bank accounts and investments may trigger a Foreign Bank Account Report (FBAR) and Form 8938 reporting, and interests in foreign entities, trusts, or passive foreign investment companies may require additional forms. Missed filings can lead to high penalties and may affect other tax positions. Also, certain international rules like Subpart F can create phantom income and punitive US tax treatment.

State residency is separate from federal tax residency. You may remain taxable by your former state if you keep meaningful ties there, such as a home, driver’s license, voter registration, or family connections. States also vary in how they treat the FEIE and foreign tax credits.

Payroll taxes

The FEIE does not eliminate social security or Medicare taxes. Employees of US employers may remain subject to the Federal Insurance Contributions Act (FICA) on foreign compensation, but if a social security totalisation agreement exists with the host country you may be able to avoid double taxation and coordinate benefits. 

Expatriation tax

Renouncing US citizenship can create a separate expatriation tax. For certain taxpayers, worldwide assets may be treated as sold at fair market value before expatriation, potentially creating a major one-time tax cost.

Before moving, work with an advisor to model the exclusion against foreign tax credits, document travel and workdays, review payroll and totalisation treatment, establish the intended state-residency position, and inventory foreign reporting obligations. 

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Allison Kazarian is a senior International tax manager at Mowery & Schoenfeld, specialising in US international tax (inbound and outbound), subpart F and GILTI, and M&A tax due diligence. She has also worked as an estate and tax planning attorney.