Understanding Double Taxation for U.S. Expats

Introduction - Why Double Taxation Matters for U.S. Citizens Living Abroad

Americans living outside the United States often face a unique combination of tax rules. While their foreign country may tax their income, the United States also taxes worldwide income for all U.S. citizens and residents. This dual framework creates the possibility that the same income could be taxed twice—once in the country where it is earned, and once by the United States.

To help prevent this, the U.S. tax system includes mechanisms such as:

• the Foreign Earned Income Exclusion (FEIE), and
• the Foreign Tax Credit (FTC).

In addition, some countries have tax treaties with the United States, which may help reduce certain types of double taxation depending on circumstances.

Understanding how these mechanisms work—and how they interact—is important for individuals planning to work, invest, earn income, or retire abroad. This article provides a neutral, factual overview of how double taxation considerations operate for U.S. expats. It is for educational purposes only and is not tax or investment advice.

Section 1 - U.S. Citizens Are Taxed on Worldwide Income

The United States is one of the only countries in the world that taxes citizens on worldwide income, regardless of where they live.

This means that U.S. expats may need to report and potentially pay tax on income from:

• employment
• self-employment
• dividends
• interest
• rental income
• capital gains
• pensions
• business activities
• certain foreign entities

Even if the foreign country imposes its own tax, U.S. reporting still applies.

Key U.S. filing rules for expats:

The risk of double taxation arises when income faces taxation in both jurisdictions—unless mechanisms apply to mitigate it.

Section 2 - Where Double Taxation Can Occur

Double taxation can occur in several scenarios:

1. Employment Income

If the country of residence taxes wages, and the U.S. taxes worldwide income, the same employment income might be taxed twice unless FEIE, FTC, or treaty provisions apply.

2. Investment Income

Examples include:

• dividends
• interest
• capital gains
• foreign mutual funds
• foreign ETFs
• savings products

Many countries tax investment income differently than the U.S.
FTC may help reduce overlap depending on income type.

3. Pension and Retirement Income

Some countries tax foreign pension distributions.
The U.S. may also tax these distributions depending on source and treaty provisions.

Treatment varies significantly.

4. Rental Income

Rental income earned abroad may be taxed:

• by the local jurisdiction, and
• by the United States.

FTC may offset some or all U.S. tax depending on circumstances.

5. Self-Employment Income

Self-employed individuals may face:

• U.S. income tax
• U.S. self-employment tax (Social Security/Medicare)
• foreign business or social taxes depending on the jurisdiction

Certain social security totalization agreements may help determine which system applies.

Section 3 - How the Foreign Earned Income Exclusion (FEIE) Affects Double Taxation

FEIE allows qualifying individuals to exclude a portion of foreign earned income from U.S. taxation.

FEIE may reduce double taxation when:

• the foreign country taxes employment income, and
• FEIE excludes earned income from U.S. taxation, thereby reducing overlap.

FEIE does not apply to:

• dividends
• interest
• capital gains
• pension income
• rental income
• passive income
• self-employment tax

Because FEIE removes earned income from U.S. taxable income, individuals in low- or no-tax countries may rely more heavily on FEIE when foreign tax is not available to offset U.S. tax liability.

However:

• FEIE may limit the ability to use FTC for other income types
• FEIE-excluded income cannot be used for IRA contributions
• selecting FEIE requires meeting residence or physical presence tests

Suitability depends on the individual’s tax and income profile.

Section 4 - How the Foreign Tax Credit (FTC) Helps Offset Double Taxation

FTC provides a credit for foreign income tax paid.

FTC may help reduce or eliminate double taxation when:

• income is taxed in a foreign country
• that same income is also taxable by the U.S.
• foreign tax is equal to or higher than U.S. tax on that income
• documentation supports the foreign tax paid

FTC can be used for:

• earned income
• dividends
• interest
• rental income
• business income
• certain capital gains

FTC is not always available for:

• certain tax-exempt income
• social taxes depending on structure
• specific foreign pensions
• income taxed at source-only
• situations where no foreign tax is paid

FTC limitations include:

• foreign tax must be “income tax (or in-lieu-of income tax)”
• credit cannot exceed U.S. tax on the same income category
• unused credits may be carried forward (subject to rules)
• cannot use FTC on income that was excluded via FEIE

FTC is often relevant in high-tax jurisdictions.

Section 5 - When Individuals May Use Both FEIE and FTC

FEIE and FTC cannot be applied to the same income.
However, individuals sometimes use FEIE for earned income and FTC for certain other income (e.g., investment income).

Decisions may depend on:

• foreign tax rate
• income type
• long-term goals
• whether foreign tax was paid
• how much of the income is earned vs passive

For example:

• FEIE for foreign earnings
• FTC for dividends taxed abroad

The combination varies case by case.

Section 6 - The Role of Tax Treaties

The United States has income tax treaties with more than 60 countries.

The purpose of these treaties is to:

• help avoid double taxation
• define taxing rights
• allocate specific income categories
• provide mechanisms for relief
• create tie-breaker rules for residency

Treaties may contain rules for:

• pensions
• interest
• dividends
• royalties
• student income
• teacher allowances
• business profits
• government service income

Treaty relief varies significantly by jurisdiction.

Some treaties:

• assign primary taxing rights to residence country
• reduce withholding on certain types of income
• provide methods for tax relief
• prevent certain types of double taxation

Treaties do not eliminate filing requirements.

Countries with notable benefits for U.S. expats include:

• UK
• France
• Germany
• Canada
• Australia
• Japan

Each treaty has unique terms; outcomes depend on country-specific rules.

Section 7 - Countries Without U.S. Tax Treaties

Some countries do not have an income tax treaty with the U.S.

Examples:

• UAE
• Qatar
• Saudi Arabia
• Singapore
• Hong Kong
• Thailand
• Malaysia
• South Africa

In these jurisdictions:

• statutory U.S. rules apply
• standard FTC rules apply
• FEIE may be more commonly used for earned income
• double taxation depends on local law

Because no treaty governs pension, investment, or passive income treatment, tax outcomes may vary.

Section 8 - Common Scenarios Where Double Taxation Questions Arise

Double taxation concerns often stem from the following situations.

Scenario 1 - Salary Earned Abroad

If a country taxes employment income:

• FEIE may reduce U.S. taxable income
• FTC may offset U.S. tax
• The combination depends on income type and local tax rules

Scenario 2 - Rental Income From Foreign Property

Local property taxes, stamp duties, or other structural taxes may interact with U.S. rules.

FTC may reduce overlap depending on whether the local tax is considered eligible.

Scenario 3 - Dividends From Foreign Companies

Foreign dividends may have:

• source-country withholding tax, and
• U.S. tax implications.

FTC may apply depending on circumstances.

Scenario 4 - Foreign Pensions

Foreign pension taxation varies significantly.

Some countries:

• tax pension distributions
• provide tax relief under treaties
• exempt certain pensions

U.S. rules may differ.

Scenario 5 - Business Income

Business income may:

• be taxed locally
• be taxed by the U.S.
• require FTC coordination

The structure of the foreign business also matters.

Scenario 6 - Capital Gains

Some countries do not tax capital gains.
The U.S. may tax these gains.

Double taxation depends on foreign and U.S. rules.

Section 9 - How Residency Status Affects Double Taxation

Residency for tax purposes affects:

• whether the foreign country taxes the income
• whether treaty provisions apply
• whether FEIE is available
• the availability of FTC
• how pensions and investments are taxed

Understanding both U.S. residency rules and local residency rules may help individuals evaluate which method is appropriate.

Section 10 - Double Taxation and Multi-Country Income

U.S. expats may earn income from:

• global employment
• investments in multiple countries
• property abroad
• business activities in third countries

This may require:

• applying FEIE to certain income
• applying FTC to income taxed abroad
• considering multi-year consistency

Income categories often need to be separated for U.S. tax reporting.

Section 11 - Hypothetical Examples (Illustrative Only)

The following examples do not represent actual clients.

Example 1 - Employee in a High-Tax Country

Profile:

• Lives and works in France
• Pays French tax on wages

Considerations:

• FTC may reduce U.S. tax exposure
• FEIE may not be impactful due to high foreign tax already paid

Example 2 - Individual in a No-Tax Country

Profile:

• Lives in UAE
• Pays no tax locally

Considerations:

• FEIE may reduce U.S.-taxable income
• FTC may be limited due to minimal foreign tax paid

Example 3 - Global Investor With Multi-Country Income

Profile:

• Lives in Asia
• Receives dividends from UK
• Owns property in Europe

Considerations:

• FTC may apply to income taxed abroad
• FEIE applies only to earned income

Example 4 - Self-Employed Consultant

Profile:

• Operates business from abroad
• Pays tax in country of residence

Considerations:

• FTC may reduce overlap
• FEIE does not eliminate self-employment tax

Section 12 - Key Considerations Checklist for U.S. Expats

Section 13 - How Skybound Wealth Management USA Supports Individuals

Skybound USA assists individuals with:

• understanding FEIE vs. FTC considerations in coordination with tax professionals,
• analysing global income sources for U.S. planning purposes,
• PFIC-aware investment structuring,
• identifying U.S.-domiciled investment options,
• long-term retirement planning across jurisdictions,
• multi-currency and global planning,
• evaluating U.S. retirement account considerations,
• modelling long-term income and residency interactions through tools such as MoneyMap.

Conflict Disclosure:

Skybound USA may receive compensation for advisory services involving assets under management. Individuals should consider all available options before making decisions.

Next Steps

If you would like to review how double taxation considerations relate to your long-term financial plans as a U.S. expat, you may schedule a discussion with Skybound Wealth Management USA.