The IRS Doesn’t Care Where You Live. A U.S. Tax Guide for Americans Abroad

Moving abroad changes your finances, but it doesn’t change your U.S. tax obligations. I regularly talk to clients who assume that once they or their income and assets leave the U.S., the IRS is no longer interested. Unfortunately, that’s not the case. The U.S. taxes its citizens on their worldwide income, and requires reporting of foreign accounts and assets, regardless of where you live.

Many expats also assume a side hustle, like freelance work or an online shop, is too small or too casual to count. Again, the IRS doesn’t see it that way. For most expats, the real risk isn’t double taxation. It’s missing a filing or reporting requirement that they didn’t know existed, and the risk only grows as you, your money and your assets become more international.

Treat side-hustle income like business income from the start

Side-hustle income, such as freelance work, consulting, ecommerce or creating content a few hours a week, counts as taxable income in the U.S., even when the client is abroad, and you’re paid into a foreign bank account. Earning money outside the U.S. doesn’t move it outside the U.S. tax system.

That income also triggers self-employment tax, a 15.3% rate many expats running a side business overseas don’t expect. Expat tax breaks like the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit can help reduce or eliminate US tax on foreign income, but neither touches self-employment tax.

Start keeping records of income and deductible business expenses as soon as the money starts coming in. Reconstructing a year of transactions at tax time is harder than tracking them from day one.

Track and stay ahead of foreign bank account reporting rules

Living abroad typically means opening at least one foreign bank account, and entrepreneurs running a side business can quickly end up with several, split between personal and business use.

The rule is simple: if the maximum value of your foreign financial accounts combined exceed $10,000 at any point during the year, you must file a Foreign Bank Account Report (FBAR). That threshold applies across all your accounts, including business accounts you control, not to each account separately.

Say you have an account set up to receive payments for your freelance consulting work, where the highest balance was $8,000 during the year, and a personal checking account for everyday expenses that peaked at $3,000. Neither account alone crosses the $10,000 threshold, but together they total $11,000, so you’d still need to file an FBAR and report both accounts.

US expats may also have to file under FATCA using Form 8938, which applies at higher thresholds that vary based on filing status and whether or not you live abroad. Neither FBAR nor FATCA is a tax. Both are reporting requirements only, but failing to file either can bring steep penalties.

Keep track of your foreign accounts and their highest balances each year to avoid an expensive mistake.

Be careful with foreign investments and business structures

An investment product or structure that’s ordinary, even tax-efficient, where you live, can be treated very differently by the U.S. Foreign mutual funds, and even some foreign pensions are good examples. The IRS often classifies them as Passive Foreign Investment Companies (PFICs), a designation that can come with punitive tax treatment and complex reporting obligations.

The same issue comes up when a side hustle grows, and you decide to form a local company. A structure that works well under local law can create new and involved reporting obligations, such as Form 5471 for U.S. owners of certain foreign corporations.

Check the U.S. tax treatment before buying a foreign investment or incorporating abroad, not after.

Make cross-border tax planning part of your routine

In my practice, the clients who avoid costly surprises are the ones who review their tax position as decisions happen, not once a year when the return is due. Check in whenever you start a new income stream, open an account, buy a foreign investment, or take an ownership stake in a business.

Organization and proper documentation go a long way here: track account balances, income invoices, taxes paid abroad, and foreign investments. Structure bigger business or investment decisions with both tax systems in mind.

Don’t let success abroad become a tax problem back home

Living abroad shouldn’t stop you from earning extra income, growing your side hustle into a business, or investing globally, but it does mean you’ll have to be mindful of two tax systems simultaneously. By understanding your reporting obligations, however, you can prevent international opportunities from becoming a U.S. tax problem down the road.

Moving abroad changes your finances, but it doesn’t change your U.S. tax obligations. I regularly talk to clients who assume that once they or their income and assets leave the U.S., the IRS is no longer interested. Unfortunately, that’s not the case. The U.S. taxes its citizens on their worldwide income, and requires reporting of foreign accounts and assets, regardless of where you live.

Many expats also assume a side hustle, like freelance work or an online shop, is too small or too casual to count. Again, the IRS doesn’t see it that way. For most expats, the real risk isn’t double taxation. It’s missing a filing or reporting requirement that they didn’t know existed, and the risk only grows as you, your money and your assets become more international.

Treat side-hustle income like business income from the start

Side-hustle income, such as freelance work, consulting, ecommerce or creating content a few hours a week, counts as taxable income in the U.S., even when the client is abroad, and you’re paid into a foreign bank account. Earning money outside the U.S. doesn’t move it outside the U.S. tax system.