Freedom FilesFreedom Files

Citizenship-Based Taxation Explained: How Americans Are Taxed Abroad and 4 Ways to Reduce the Bill

The United States is one of only two countries in the world that taxes its citizens on worldwide income regardless of where they live, bank, or earn. Learn what citizenship-based taxation is, who it truly pulls in (spoiler: it's more than just expats), the exit tax that hits high-net-worth renouncers, and the four moves that can bring your US tax bill close to zero without renouncing.

Transcript

Click to read the full transcript

You can leave the United States, never earn another dollar on US soil, and yet owe the IRS half of your income every single year. Only one major country levies this tax. And lucky you, you're subject to it. In this video, you'll learn what this system is, how it impacts you, and what you can do about it. There are a few ways to counteract it. Let's get into it.

Before we begin, I'm obligated to note that I am not a financial or tax adviser. This is for information purposes only.

Most countries tax you based on where you live. If you're Canadian and you move to Portugal, you become a Portuguese taxpayer and Canada stops taxing you. Simple. The United States does not work like that. America taxes its citizens on worldwide income wherever they happen to live. This is called citizenship-based taxation. Where you live, where you earn, even where you bank does not count. Your citizenship is the trip-wire.

Out of roughly 195 countries worldwide, only two tie your tax bill to your citizenship instead of your residency. The United States is one, and the other is Eritrea, a small country in East Africa most people cannot find on a map. Hungary has some elements of a similar system, but nowhere near the reach the United States has.

If you were born in Ohio, moved to Spain 15 years ago, and earn all your money in euros from Spanish clients, the IRS expects a full US tax return every single year. Your Spanish bank is also required to report your account and transactions to the United States government year after year. The IRS does not care that you have not lived in the US since flip phones were cool.

Who citizenship-based taxation truly affects. This trips people up. Citizenship-based taxation does not only impact the handful of jet-setting expats you might picture. Three large groups get pulled in.

First, Americans who moved abroad and built a life somewhere else. Millions of them. They file every year, and many owe little or no US tax after the credits and breaks. This is probably who you pictured first, and it might be you or future-you.

Second, so-called accidental Americans. These are people born on US soil to foreign parents who left as babies and never went back, or people born abroad to at least one American parent who were granted citizenship yet have never even been to the United States. Under US law, they are US citizens. They owe US taxes. Many discover their status only when a foreign bank asks their nationality and refuses to open an account.

Third, and this one blindsides people, US green-card residents. If you had a green card in eight of the last fifteen years, the US treats you as a long-term resident and a US person for tax purposes, and you get pulled into the same web as an American citizen. Letting the card lapse or moving back to another country does not end this tax. There is a formal step required to end the treatment, and skipping it can cost thousands or millions over the long term.

To be fair, most Americans who live abroad do not end up with a giant US tax bill. Two tools soften the blow. The Foreign Earned Income Exclusion (FEIE) shields your first $135,000 of earned income from US tax in 2026 (the threshold rises every year). The Foreign Tax Credit (FTC) offsets your US tax with the tax you already pay wherever you live, whether that is Spain, Panama, or Brazil. Add a double-tax treaty on top and many Americans owe close to zero in the United States.

Where is the pain then. Two places. One, if you earn a lot, you're paying a lot in taxes overseas AND you may pay even more to the United States. Two, the filing never ends, and the banking may be even worse. FATCA — the Foreign Account Tax Compliance Act, introduced under President Obama — forces foreign banks to report their American account owners to the IRS every single year. Plenty of banks decided Americans are not worth the paperwork and simply close those accounts or refuse to open new ones. You can be a centimillionaire in Geneva or a decamillionaire in Bangkok and get turned away for having the wrong passport.

Renunciation and the exit tax. The paperwork is the slow bleed. The sharp pain comes when you try to cut the cord for good. Many Americans eventually say "fine, I'm out, I'll give up my US citizenship." Then comes the toll booth.

If you renounce your American citizenship, first you must already have a second citizenship to default to. Second, you may have to pay what is called the exit tax, which hits a group the tax code labels "covered expatriates". You become one if you trip any of these three wires on the day you leave. One, your net worth is $2 million or more (that number has not moved in years). Two, your average US income tax over the last five years is above $211,000 in 2026 (again, that figure moves). And three, you cannot certify five clean years of US tax filings.

If you're a covered expatriate, even if you are not rich, the IRS pretends you sold everything you own the day before you leave. Your homes, your stocks, your businesses, your crypto. All of it marked as if sold. The gain above roughly $900,000 in 2026 gets taxed. Retirement accounts are treated as cashed out on the spot. And there is a nasty tail: gifts or inheritance a covered expatriate later leaves to family back in the States can be hit at 40%, paid by the person who receives it.

As you can see, most people who renounce US citizenship owe quite a bit in exit taxes because they have crossed those lines. This is not a week's decision. You plan years ahead.

Which brings us to the question you came here for. What can you do about all of this? Four moves worth knowing.

One, get compliant and continue filing if you are behind. The IRS has a catch-up path called the Streamlined Procedure that lets many people fix missed years without penalties.

Two, use every break you are owed. The Foreign Earned Income Exclusion, the Foreign Tax Credit, and any double-tax treaty between the US and wherever you have tax residency all help. Use them and your US bill can land near zero even while the filing grinds on. This comes with a caveat: choose a tax-friendly jurisdiction carefully. Territorial-tax systems (Costa Rica, Uruguay, Panama, Paraguay), remittance-based systems (Malta), and non-dom regimes (Cyprus, Greece, Ireland) each have their own rules. Pick badly and you can owe more tax in your second country than you were paying in the United States.

Three, plan before you ever think about leaving. If renouncing is even a maybe someday, the structuring happens in the calendar years before, and step one of any exit plan is a second citizenship somewhere else so you are never stateless and never boxed into a single jurisdiction.

Four, watch the law because it is moving for the first time in a generation. More on that in a second.

If you are weighing either a second residency or a second citizenship and you don't know what fits, that is what the Freedom Consult is for. A 60-minute working session where we walk through your goals, your budget, and your situation and you leave with the right program or programs for you.

What is changing in 2026. For decades, citizenship-based taxation was a fact of life nobody in Washington wanted to touch. That may be shifting. Expats are a large voting bloc. During the 2024 campaign, President Trump said in plain words that he supports ending citizenship-based taxation and the double taxation of Americans abroad. That is a big promise.

The question is whether the administration has put anything on the table since taking office. Congressman Darren LaHood introduced a bill called the Residence-Based Taxation for Americans Abroad Act. What it would do: a qualifying American abroad could elect to be treated as a non-resident for US tax purposes without renouncing anything. You would owe US tax only on US-source income (say, the rent from a rental property you have in the States) and nothing on foreign salary or foreign investments. It would also give relief from FATCA reporting and the FBAR (Foreign Bank Account Report).

Sounds great, but this is not law, nor has it gained much traction in Congress. It was left out of the big 2025 tax package everyone was watching, and right now it is being rewritten with Indiana Senator Todd Young for another attempt in Congress. It also preserves the US estate and gift tax on your worldwide assets, so even the dream version does not fully cut the cord.

A campaign line is not a statute. Bills get watered down, delayed, or dropped entirely. Plan for the law as it reads today and treat any improvement as icing on the cake.

One piece of good news for anyone considering renunciation: in April 2026 the government cut the fee to formally renounce US citizenship from about $2,500 down close to $450 — roughly what it was in 2010. Granted, most people considering renunciation are decamillionaires and centimillionaires for whom this is a negligible change, but it is worth flagging.

Are you leaning toward retaining your US passport, or building an exit? I'm not taking a stake here, just informing you. Here is how I would think about it. If you are seriously considering cutting ties, the exit tax and the second-citizenship requirement mean you should start years earlier than you think and get proper advice. If you want a Plan B either way — a second residency that converts to citizenship, or citizenship directly that gives you options — we are here. We are program-agnostic. We just want the best fit for you and your family.

If you are weighing several options or aren't sure what fits, book a Freedom Consult. If you already know which program fits and you just want your questions answered, you can book a free 15-minute call instead.

If you want the fastest way to get a second passport in hand, direct citizenship-by-investment, watch my breakdown on the cheapest citizenships you can buy in 2026. That's on your screen now. Talk soon.

Related on Freedom Files

More long-form and short-form coverage on the same topics, swipe sideways for the full strip.

  • Portugal for Americans in 2026: Golden Visa, D7, D8, and the 10-Year Citizenship Clock

    Since the early 2010s, Portugal has been the default European base for American investors and expats. Four significant changes over the past few years have subtly rewritten who the country fits and who it does not. The NHR tax regime is gone for new arrivals. The Golden Visa's property route was closed. Citizenship went from five to ten years, and the clock now starts when your residence card is issued, not when you file. Here's what changed, how the three remaining pathways (Golden Visa, D7, D8) really work for Americans, and why one type of investor is walking away with one of the best deals in Europe.

    • Deep dive
    • Residency
    • Citizenship
    • Tax
    • Portugal
    • Europe
    • Golden Visa
  • Jul 15, 202611 min read

    France's Passeport Talent: Europe's Most Overlooked Golden Visa for Americans in 2026

    While Spain shut its golden visa in 2025 and Portugal's citizenship clock stretched to 10 years, France naturalizes long-term residents in five, and the Passeport Talent investor track gets you an EU residence card for a €300,000 productive-business investment without requiring you to move, learn French, or trigger French tax residency. Here's exactly how the program works, the trap most articles miss on French tax residency, and the 2026 rule changes to know before you plan on citizenship.

    • Deep Dive
    • Residency
    Read more →
  • France's Passeport Talent Golden Visa: The €300K Investor Route for Americans

    France's Passeport Talent is the overlooked European golden visa, €300,000 into a productive French business, a four-year renewable residence card for your whole family, no French language requirement to get the card, and a naturalization clock less than half as long as Portugal's. Here's how it works, the trap most articles miss on French tax residency, and the 2026 rule changes to know before you plan on citizenship.

    • Deep dive
    • Residency
    • Citizenship
    • Tax
    • France
    • Europe
    • Golden Visa
  • Jul 21, 202612 min read

    US Citizenship-Based Taxation: How Americans Abroad Are Taxed on Worldwide Income (and How to Reduce It)

    The United States is one of only two countries in the world that taxes its citizens on their worldwide income regardless of where they live, bank, or earn. Here's what citizenship-based taxation is, who it pulls in (expats, accidental Americans, and long-term green-card residents), the tools that can bring your US tax bill close to zero without renouncing, the exit tax that lands on high-net-worth renouncers, and the 2026 bill that might finally end the whole thing.

    • Deep Dive
    • Tax
    Read more →
  • Jul 18, 202612 min read

    Is Portugal Worth It for Americans in 2026? Golden Visa, D7, D8, NHR, and the New Citizenship Clock

    Portugal has spent the past five years dismantling most of what made it the default European base for Americans. The NHR tax regime closed to new arrivals in 2024, the Golden Visa property route was cut in 2023, and citizenship stretched from five years to ten with the clock restarting at card issuance. Here's what truly changed, who Portugal no longer fits, and why one very specific type of American investor is walking away with one of the best deals in Europe.

    • Market update
    • Residency
    Read more →
  • Turkey Citizenship by Investment: Why Americans Are Buying Turkish Passports in 2026

    Turkey's citizenship-by-investment program hands you a Turkish passport in six months for a recoverable $400,000 real estate purchase, not a sunk donation. Pair it with the new Law No. 7582 that exempts foreign-source income from Turkish tax for twenty years, and the math points somewhere Americans are already noticing. Here's the full 2026 walkthrough, the routes, the risks, and who the program actually fits.

    • Deep dive
    • Citizenship
    • Tax
    • Turkey
  • 10 Best Underrated Cities for American Expats in 2025

    Forget Dubai and Tokyo, because the cities Americans are quietly falling for give you big-city life without the big-city price tag. One offers a $400,000 fast-track to citizenship, another taxes none of your US retirement income, and number one serves the best food on the planet.

    • Market update
    • Tax
    • Citizenship
    • Residency
    • Spain
    • France
    • Colombia
    • Portugal
    • Turkey
    • Greece
  • Jul 13, 202614 min read

    Why Americans Are Moving to Latin America: 5 Reasons and the 8 Countries They Choose in 2026

    American investors and their families are moving to Latin America faster than to any other region, and the reasons go well beyond sunshine. Here are the five structural drivers behind the shift, plus the exact residency and citizenship-by-investment programs in Mexico, Costa Rica, Panama, the Dominican Republic, Colombia, Brazil, Uruguay, and Argentina that our US clients are using in 2026. With the honest trade-offs on each.

    • Market update
    • Comparison
    Read more →
  • Why Americans Are Moving to Latin America: 5 Reasons and the 8 Countries They Choose in 2026

    American investors and their families are moving to Latin America faster than to any other region, Mexico, Costa Rica, Panama, Dominican Republic, Colombia, Brazil, Uruguay, and Argentina. Here are the five reasons driving the shift plus the exact residency and citizenship-by-investment programs Americans are using in 2026, warts and all.

    • Market update
    • Comparison
    • Residency
    • Citizenship
  • Jul 8, 202611 min read

    Turkey Citizenship by Investment: Why Americans Are Buying Turkish Passports in 2026

    Turkey's citizenship-by-investment program hands you a Turkish passport in six months for a $400,000 real estate purchase you can resell after three years, capital that comes back, not a sunk donation. Pair it with the new Law No. 7582's twenty-year tax exemption for new residents, and the math points somewhere it did not point twelve months ago. Here is the honest 2026 walkthrough, how the routes work, where the currency risk lives, who the passport fits, and who is better served by a European golden visa instead.

    • Citizenship
    • Tax
    Read more →

Freedom Files newsletter

Get the next issue

Short emails on the policy moves, program updates, and the math underneath.

Have a specific situation?

The 15-minute conversation is the fastest way to find out whether anything in this video actually fits your family.

Get your custom Plan B Blueprint

Most people spend 100+ hours researching residency and citizenship options before they realize they were looking at the wrong programs. We compress that into 10 questions, 90 seconds, and a single report.