Moving Back to the U.S. After Living Abroad — Tax Rules

Moving back to the United States reverses the expat tax setup in one year: the foreign earned income exclusion covers only the days before you return, your arrival state starts taxing you at once, and the foreign accounts, pensions, and funds that were manageable abroad become harder to hold from inside the U.S. The return year is best planned before the flight.

On this page

1. How does the exclusion work in the year I return?
2. When does my state start taxing me?
3. What happens to my Form 8938 thresholds?
4. What about my foreign pension and investments?
5. Should I sell my foreign home before or after returning?
6. What else resets?
7. Frequently asked questions
8. Next step

How does the exclusion work in the year I return?

It's prorated to the days you still qualified. Under the bona fide residence test, the period ends on the day you move back and the days before it count; under the physical-presence test, you need a 12-month window of 330 days abroad that ends on or before your return. Foreign earned income earned before the move is excludable up to the prorated limit; U.S. income after it is ordinary. The housing exclusion prorates the same way.

When does my state start taxing me?

The day you establish residence — usually the day you arrive with the intent to stay. You'll file a part-year resident return for the arrival state and report worldwide income from that date. Income earned abroad before the move is generally outside the state return, but some states will still look at foreign-source income received after arrival (a final foreign bonus, for example). Choosing the arrival state is a legitimate planning point if your work allows it.

What happens to my Form 8938 thresholds?

They may drop. The higher "abroad" thresholds require meeting the bona fide residence or physical-presence test for the year. A mid-year return ends bona fide residence, but you can still qualify under the physical-presence test if a 12-month period with 330 full days abroad ends within that tax year — common for someone who returns after mid-year. If neither test is met, the domestic thresholds apply — $50,000 at year-end or $75,000 at any time for single filers, double for joint — and accounts that were well under the abroad thresholds suddenly need reporting. The FBAR is unaffected; foreign accounts stay reportable above $10,000 wherever you live.

What about my foreign pension and investments?

This is where the return year costs money if unplanned:

• Foreign pensions protected by a treaty article while you were resident abroad may lose that protection once you're a U.S. resident, depending on the treaty. Contributions and growth can become currently taxable.
• Foreign mutual funds were already passive foreign investment companies; now you're a U.S. resident with no local reason to hold them. Selling triggers the default PFIC tax on built-in gain; keeping them continues annual Form 8621 reporting. Either way, the calculation should be done before you move, when timing options still exist.
• Foreign bank accounts can be kept, but many foreign banks close accounts for U.S. residents under FATCA. Decide what to repatriate and when, with an eye on exchange rates and the FBAR.

Should I sell my foreign home before or after returning?

If it was your principal residence, the home-sale exclusion applies either way as long as you meet the two-of-five-year test — but the two-year window runs from when you stopped living there, so a long delay forfeits it. Currency effects on the gain and on any foreign mortgage payoff don't depend on where you live. Local tax on the sale is often lower for residents than non-residents, which argues for selling before you leave.

What else resets?

• Medicare and Social Security: enrollment windows open on return; late-enrollment penalties for Part B are assessed if you delayed without other creditable coverage.
• Retirement accounts: IRA contributions become possible again once you have unexcluded compensation.
• Foreign tax credits: carryovers in each basket survive the move and can finally be used if you have foreign-source income — or they sit until they expire.
• Form 673: withdraw it from your employer so withholding restarts; otherwise you'll owe at filing.

Frequently asked questions

Next step

Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. If you're planning a return to the U.S., our U.S. Tax Desk can sequence the moves — what to sell, keep, and report — before the year is locked in. See pricing or book a free fit call.