Streamlined Filing for Americans Abroad (Outside Canada): The Same Procedure, Different Accounts, and the Countries Where the FEIE Matters

The streamlined procedures do not care which country the taxpayer lives in. The eligibility test (330 days outside the US in one of the three years, no US abode), the package (three returns, six FBARs, Form 14653), and the result (no penalties for non-willful conduct) are identical for an American in any country. What changes is the content of the returns: each country has its own tax-advantaged accounts that the US does not recognize, its own pension system with or without treaty protection, its own tax rate that decides whether the foreign tax credit or the foreign earned income exclusion produces the better result, and its own totalization agreement with the US or none. Fairlight's practice is Canada; the procedure is universal, and the analysis below shows how it changes country by country.

Key takeaways

• The procedure is the same: SFOP eligibility, three returns, six FBARs, the certification, no penalties.
• High-tax countries (the UK, Australia, Germany, France): the foreign tax credit usually eliminates US tax on earned income, as in Canada; the local tax-advantaged accounts (UK ISA, Australian superannuation, French assurance-vie) are the US problem, each with its own characterization (taxable account, foreign trust, or pension).
• No-tax or low-tax countries (the UAE, Singapore at low rates, the Cayman Islands): no foreign tax to credit; the FEIE (about $130,000) and the housing exclusion are the tools; income above the exclusion is US-taxable in full.
• Treaty countries (the UK, Australia, Germany, France, and about 65 others) have tie-breaker rules, pension provisions, and resourcing rules that vary; the UK treaty protects pensions; the Australian treaty does not address superannuation clearly. Non-treaty countries (the UAE, Singapore, Hong Kong) have none.
• Totalization agreements (about 30 countries) prevent double social security tax; a self-employed American in a non-agreement country owes US self-employment tax on top of local contributions.
• PFICs everywhere: local mutual funds and ETFs in any country are PFICs for a US person; only US-domiciled funds are not.

What stays the same

Eligibility: a US citizen or green card holder with no US abode who was outside the US for 330 full days in at least one of the three most recent years. Non-willfulness certified on Form 14653 with a specific narrative. No open examination. The package: three years of complete 1040s with every information return, six FBARs, the certification, and payment of tax and interest. No penalties for the covered years.

The FBAR and Form 8938 apply to accounts in any country; the thresholds are the same ($10,000 aggregate for the FBAR; $200,000/$400,000 year-end for Form 8938 for taxpayers abroad).

What changes: the accounts

United Kingdom. An ISA (cash or stocks and shares) is tax-free in the UK and fully taxable in the US; its income is reported annually; a stocks and shares ISA holding UK funds has PFICs. A SIPP or workplace pension is protected by the US-UK treaty's pension article (contributions and growth deferred). The UK's 25% tax-free pension lump sum is taxable in the US unless the treaty position is taken carefully.

Australia. Superannuation is the hard case: the US-Australia treaty predates the modern super system, and the IRS has not ruled on whether super is a pension (deferred), a grantor trust (Forms 3520/3520-A, income taxed annually), or an employee trust; practitioners take different positions, and the streamlined submission must choose and document one. Australian managed funds are PFICs.

France, Germany, other EU. French assurance-vie contracts are often treated as PFICs or foreign trusts; German Riester and Rürup pensions are generally treaty-protected; local funds are PFICs. The foreign tax credit covers earned income.

Portugal. The former non-habitual resident regime taxed foreign pensions at 10% and some income at zero; an American under it had low foreign tax and may find the FEIE and the foreign tax credit both matter. Portuguese funds are PFICs.

United Arab Emirates and other no-tax countries. No income tax; no foreign tax credit. The FEIE excludes about $130,000 of earned income (per spouse) and the housing exclusion covers rent above the base amount up to the Dubai cap; earned income above that is US-taxable at full rates; investment income is US-taxable in full. Local bank accounts are FBAR accounts; local funds are PFICs.

Mexico. Afore retirement accounts and Mexican funds require analysis; the treaty covers pensions; Mexican tax on employment income is moderate and the credit or FEIE comparison is close.

FEIE or foreign tax credit

In Canada and other high-tax countries the credit wins (it eliminates the tax and carries forward; the FEIE wastes the credit and blocks the refundable child tax credit). In no-tax countries the FEIE is the only tool for earned income. In mid-tax countries the comparison is run year by year. The streamlined returns make the election on the earliest year; the FEIE, once elected, binds for five years after revocation, so the choice is made with the future in mind.

Totalization

The US has totalization agreements with about 30 countries (Canada, the UK, Australia, most of the EU, Japan, South Korea, Mexico, and others). A self-employed American in an agreement country is covered by one system only (usually the residence country's); in a non-agreement country (the UAE, Singapore, Hong Kong, most of Asia, Africa, and Latin America) US self-employment tax applies to net earnings with no offset for local contributions.

Treaty tie-breakers

An American resident abroad is a US resident by citizenship regardless of treaty; the tie-breaker matters for green card holders and for the resourcing of US-source income. Treaty countries have pension articles that protect local retirement accounts to varying degrees; non-treaty countries do not, and local pension plans in those countries may be foreign trusts or taxable accounts.

Worked example

Three Americans, each with an unfiled three years:

• London. Salary £90,000; UK tax about £25,000; a stocks and shares ISA holding UK funds; a workplace pension. SFOP: foreign tax credit eliminates US tax on salary; ISA income reported with Forms 8621 for the funds; pension deferred under the treaty; FBAR on all accounts. Tax on the ISA; no penalties.
• Dubai. Salary $180,000; no UAE tax; local bank account; local funds. SFOP: FEIE excludes about $130,000; housing exclusion for rent above the base; about $40,000 of salary taxable in the US at the stacked rate, roughly $9,000 of tax a year; funds are PFICs; FBAR. Tax and interest for three years; no penalties.
• Sydney. Salary A$150,000; Australian tax about A$40,000; superannuation A$300,000; Australian managed funds. SFOP: foreign tax credit eliminates US tax on salary; superannuation position chosen and documented (treated as an employees' trust with employer contributions excluded and earnings deferred, or as a grantor trust with 3520s; the submission commits to one); managed funds as PFICs; FBAR. Tax on the funds; no penalties.

Official sources

The IRS states that a US citizen or lawful permanent resident meets the non-residency requirement where, "in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed," the individual "did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days." Eligible taxpayers "will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties." — Internal Revenue Service, U.S. Taxpayers Residing Outside the United States, https://www.irs.gov/individuals/international-taxpayers/us-taxpayers-residing-outside-the-united-states

The IRS states that to claim the foreign earned income exclusion a taxpayer's "tax home must be in a foreign country" and the taxpayer must be either a bona fide resident of a foreign country for a full tax year or "physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months." — Internal Revenue Service, Foreign Earned Income Exclusion, https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion

The Social Security Administration explains that the U.S.-Canada totalization agreement eliminates dual Social Security coverage and taxation and allows workers to combine credits from both countries to qualify for benefits. — Social Security Administration, U.S.-Canadian Social Security Agreement, https://www.ssa.gov/international/Agreement_Pamphlets/canada.html

Practitioner note

The procedure travels; the accounts do not. Every country has its ISA, its super, its assurance-vie, and every one of them is a US question with a position to take and document. Our practice is Canada, and for Americans elsewhere the streamlined submission is the same package with a different set of local accounts to characterize, and the FEIE decision that in Canada is easy becomes the real analysis in a no-tax country.

See also: New to catching up? Start with what the Streamlined Foreign Offshore Procedure is and whether you qualify, and browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight prepares the streamlined submission for an American abroad, with the local account characterization, the FEIE or credit election, and the totalization and treaty positions for the country. See cross-border pricing or book a call.