Summary
- Citizens and green card holders are taxed on worldwide income throughout the status, and the foreign tax credit relieves the income tax but not the 3.8 percent net investment income tax.
- The ordinary European holding forms, funds, family companies, life policies, pensions and foundations, are taxed under American regimes written for something else.
- Elections change most of those outcomes, but nearly all are timed, and several are lost in the first year of ownership or of residence.
- Lifetime gifts of foreign property sit inside the United States gift tax, and the Code allows no credit for a foreign gift tax.
- The two dates that decide the most are the day residence begins and the day the status ends.
Part I. What the United States taxes, and what it does not credit
A citizen is taxed on worldwide income for life, a lawful permanent resident for as long as the card is held. The card carries the status until it is formally abandoned or revoked (section 7701(b)(6)), so a person who left years ago and let it lapse in practice is generally still a United States taxpayer. The foreign earned income exclusion, $132,900 for 2026, covers earned income only: dividends, interest, rents and gains from foreign assets remain fully taxable.
Double taxation is relieved through the foreign tax credit (section 901), limited by category and by the section 904 limitation, and through the resourcing articles of the income tax conventions, which are what make the credit work for a citizen living in the treaty country. Taxes that are not income taxes, among them wealth taxes and transfer duties, are not creditable at all.
The net investment income tax of 3.8 percent (section 1411) sits outside the credit entirely. On August 31, 2026 the Federal Circuit held in Estate of Bruyea and in Christensen that the credit articles of the Canadian and French conventions do not reach it either, reversing the Court of Federal Claims in both cases: a treaty credit is subject to the limitations of United States law, and the Code confines the credit to chapter 1. The tax is best budgeted as an uncredited layer above foreign tax. California, for its part, taxes residents on worldwide income, allows individuals no foreign tax credit and does not generally follow the conventions.
Part II. The holding vehicle decides the tax
The recurring pattern is that the asset is unremarkable and the vehicle is expensive. A foreign fund, SICAV, OEIC or unit trust is a passive foreign investment company, taxed by default under section 1291 as ordinary income with an interest charge on the deferral and reported on a separate Form 8621 for each fund. The qualified electing fund election converts that into current inclusion of the fund’s own income, but it requires an annual information statement most European managers do not produce; the mark to market election (section 1296) is available where the shares are marketable.
A foreign company is classified before anything else is decided. An AG, SA, SpA, NV or public limited company is a per se corporation (Regulation section 301.7701-2(b)(8)) and cannot elect; a GmbH, SARL, Sàrl, BV or private limited company is an eligible entity that may elect on Form 8832 to be disregarded or treated as a partnership, effective up to 75 days before filing. Once the company is a controlled foreign corporation, its owner is taxed currently on subpart F income and, for tax years beginning after December 31, 2025, on net CFC tested income, the successor to GILTI, for which the section 250 deduction falls to 40 percent and the reduction for tangible assets is repealed. An election under section 962 can apply corporate rates and deemed paid credits.
| Vehicle | Default United States treatment | Election or relief |
|---|---|---|
| Foreign fund, SICAV, UCITS, OEIC | Passive foreign investment company; ordinary income and interest charge (section 1291); Form 8621 for each fund | Qualified electing fund where a PFIC statement exists; mark to market for marketable shares (section 1296) |
| Per se company: AG, SA, SpA, NV, plc | Corporation; controlled foreign corporation where United States shareholders hold control; subpart F and net CFC tested income | No classification election; section 962 election; restructure before control arises |
| Eligible company: GmbH, SARL, BV, Ltd | Corporation by default | Form 8832 election to disregarded entity or partnership, effective up to 75 days back |
| Funded occupational pension | Nonexempt employees’ trust; vesting and annual earnings taxed currently (section 402(b)) | Treaty pension article; Revenue Procedure 2020-17 for the trust reporting only |
| Assurance-vie, unit-linked bond | Not life insurance unless it meets section 7702; growth taxed annually | 1 percent excise on premiums (section 4371), Form 720; restructure before residence begins |
| Stiftung, fondation, Anstalt, local trust | Foreign trust or foreign corporation; attributed to the settlor where a United States beneficiary exists (section 679) | Forms 3520 and 3520-A; fund or unwind before residence begins |
| Real estate held personally | Rental income computed under United States rules; depreciation over 30 or 40 years | Foreign tax credit; section 121 on a principal residence |
| Real estate held in a company | Controlled foreign corporation; personal use produces a constructive distribution | Check the box or liquidate before the shares are acquired |
Part III. Real estate held abroad
Rental income is recomputed under United States rules rather than local ones. Foreign property is depreciated under the alternative system (section 168(g)(1)(A)): residential rental property placed in service after 2017 over 30 years, earlier property over 40, and commercial property over 40. Local law rarely allows depreciation on the same basis or interest on the same schedule, so the two taxes fall in different years and the credit arrives out of time, carried back one year and forward ten.
On a sale, the principal residence exclusion of $250,000, or $500,000 for a couple filing jointly, applies to a home abroad (section 121), while a local exemption for long holding does not translate. Currency is measured in dollars throughout. Repayment or refinancing of a mortgage denominated in a foreign currency is a transaction separate from the property, so a weakening currency produces ordinary gain on the debt (section 988) while the matching loss on the residence is not deductible.
Part IV. Giving foreign assets away during life
The gift tax reaches gifts of property wherever situated when the donor is a citizen or domiciled in the United States, and domicile is not the residence test used for income tax. For 2026 the annual exclusion is $19,000 per recipient and the basic exclusion amount is $15,000,000. A spouse who is not a citizen does not take the unlimited marital deduction: transfers to that spouse are sheltered only up to $194,000 for 2026 (section 2523(i)), a point developed on Estate Planning for Non-US Citizens. The Code gives no credit for a foreign gift tax, and relief exists only under the conventions that cover gifts, among them those with Australia, Austria, Denmark, France, Germany, Japan and the United Kingdom.
Funding a foreign foundation or trust is usually a completed gift as well as a reportable transfer. In the other direction, a gift or inheritance received from abroad is not income, but it is reported on Form 3520 above $100,000 from an individual or estate and above $20,573 for 2026 from a foreign company. One point governs the order of giving: a lifetime gift carries the donor’s basis while property held until death is revalued, so the low basis apartment abroad is usually the wrong asset to give and the right one to keep.
| Figure | Amount for 2026 | What it governs |
|---|---|---|
| Annual gift tax exclusion | $19,000 per recipient | Gifts of property wherever situated |
| Gifts to a spouse who is not a citizen | $194,000 | In place of the unlimited marital deduction |
| Basic exclusion amount | $15,000,000 | Lifetime gifts and the estate together |
| Foreign earned income exclusion | $132,900 | Earned income only, not investment income |
| Gifts and inheritances received from abroad | $100,000, or $20,573 from a company | Form 3520 reporting |
| Foreign accounts | $10,000 in aggregate | FBAR, FinCEN Form 114 |
| Foreign financial assets | From $50,000 | Form 8938 |
| Expatriation, income test | $211,000 average annual net income tax | Covered expatriate status |
| Expatriation, net worth test | $2,000,000 | Covered expatriate status |
| Exit tax exclusion | $910,000 of gain | Mark to market under section 877A |
Part V. The window before residence begins
Residence begins on a date fixed by statute (section 7701(b)), for a green card holder the first day of presence in that status, and nothing about that date resets the basis of what the new resident already owns: gain accrued over decades abroad becomes American gain. The work belongs in the weeks before. Gains are realized while they are still outside the system, accumulated earnings are distributed from the family company, non-conforming policies are restructured or surrendered, fund holdings are sold or elected into a workable regime, and gifts of foreign property are completed while the donor is still outside the gift tax. A foreign trust funded more than five years before residence begins escapes attribution to the settlor under section 679, which a trust funded after arrival does not.
Part VI. And the window at the end
Expatriation applies to citizens and to long-term residents, meaning green card holders in that status in at least 8 of the last 15 years (section 877A(g)(2)(B)). A person is a covered expatriate if average annual net income tax for the five preceding years exceeds $211,000 for 2026, or net worth reaches $2,000,000, or five years of compliance cannot be certified. A covered expatriate is treated as having sold everything on the day before expatriation, with the first $910,000 of gain excluded for 2026, and reports it on Form 8854; deferred compensation and interests in non-grantor trusts follow separate rules. The consequence that outlives the exit is section 2801: gifts and bequests later made by a covered expatriate to a United States recipient are taxed to the recipient at the highest estate tax rate. Abandoning a card informally is not an exit; the status runs until it is given up formally or a treaty tie-breaker position is taken.
Part VII. Practical steps
- Inventory by vehicle, not by value. Every fund, company, policy, pension, foundation and property, with the legal form of each, since the form determines the regime.
- Classify each entity before it matters. Per se or eligible, controlled or not, and what an election would cost and save.
- Put every election on a calendar. Qualified electing fund, mark to market, section 962, Form 8832 and treaty positions are all time limited.
- Model the credit and the treaty together. Expect the net investment income tax to stand uncredited, and price it rather than plan around it.
- Keep the reporting whole. Forms 8621, 5471, 3520, 3520-A, 8938 and the FBAR carry penalties measured against value; past omissions are corrected through the procedures set out on Tax Compliance.
- Treat arrival and departure as planning dates. Most of what can be done cheaply must be done before one of them.
Conclusion
Tax planning with non-United States assets is less a matter of choosing better investments than of holding the same assets in a form the American system taxes on terms that can be lived with, and of using the two dates that fix everything else. The firm advises citizens and green card holders, in the United States and abroad, on that structuring and on the reporting that follows it, from its offices in Washington, Los Angeles and Munich. The treatment of the same assets after the death is described on the page on US decedents with non-US assets. Families preparing to leave the United States will find the steps to take before departure on the page on asset and tax planning for Americans moving to Western Europe.