Almost every country in the world taxes people according to where they live. Move your home, your family and your life to another country, cut your ties properly, and your old country stops taxing your worldwide income. That is the logic behind every relocation plan built on tax residence.
The United States does not follow that logic. It taxes by citizenship. The federal regulations state it in one sentence: "all citizens of the United States, wherever resident, and all resident alien individuals are liable to the income taxes imposed by the Code whether the income is received from sources within or without the United States." Wherever resident are the two words that matter. An American who moves to Lisbon, Dubai or Manila remains inside the US tax system for as long as they hold the passport.
A Rule Upheld in 1924
The principle is old. In Cook v. Tait, decided on 5 May 1924, the Supreme Court dealt with a native-born US citizen who had taken up residence and become domiciled in Mexico City. He was asked to file a US return on income from property located in Mexico, did so under protest, and challenged the tax.
He lost. The Court, in an opinion by Justice McKenna, held that the government's taxing power over its citizens rests on the presumption that "government by its very nature benefits the citizen and his property wherever found." Where the citizen lives does not change that relationship. Citizenship does.
More than a century later, that is still the law. The shape of the system has changed, with exclusions, credits and reporting rules added on top, but the foundation is the same: the passport, not the address, decides. The wider American picture is sketched in It's Called America.
Who Else Does This?
Very few. A research paper by Paul Organ of the University of Michigan, published on the IRS statistics website in 2021, states that "only two other countries, Eritrea and Myanmar, similarly tax their citizens regardless of residence." According to the same paper, Eritrea levies a flat 2% income tax on citizens living abroad, while Myanmar applies the same rates to its citizens' income whether earned at home or abroad.
So the answer to "which countries tax citizens abroad" is short: the United States, which does it with a full income tax and a large enforcement apparatus, and two much smaller states. Among major economies, the US stands alone.
How Many People It Touches
There is no official register of Americans abroad. The most widely cited government estimate comes from the Federal Voting Assistance Program, which models the overseas citizen population. Its 2022 analysis estimated 4.4 million US citizens living overseas in 2022, of whom about 2.8 million were of voting age, spread across 185 countries.
That group includes people who moved abroad for work or retirement, and people who became citizens at birth and have spent little or none of their lives in the United States. The same rules apply to all of them.
What an American Abroad Actually Owes
The IRS summarises the obligation plainly: citizens abroad are "subject to tax on worldwide income from all sources" and must file. They receive an automatic two-month extension, so a return normally due on 15 April is due on 15 June. The IRS adds that many Americans abroad qualify for special tax benefits, "but they can only get them by filing a U.S. return."
Two tools reduce double taxation.
The foreign earned income exclusion. For tax year 2026, an American who qualifies can exclude up to $132,900 of foreign earned income, a figure set by Revenue Procedure 2025-32 and confirmed on the IRS exclusion page. One way to qualify is the physical presence test: being physically present in a foreign country "330 full days during any period of 12 consecutive months." The exclusion covers earned income: salaries and self-employment income. It does not cover dividends, interest, capital gains, rent or pensions.
The foreign tax credit. Foreign income tax paid on income that the US also taxes can usually be credited against the US bill, claimed on Form 1116. The two tools cannot be combined on the same income: the IRS states that if you exclude foreign earned income, "you cannot take a foreign tax credit for taxes on income you exclude."
The practical result depends heavily on where you live. In a high-tax country, the foreign tax credit often wipes out most or all of the US tax. In a low-tax or zero-tax country, it does not, because there is little or no foreign tax to credit. An American retiree in a country with no income tax, living on dividends and a pension, pays US tax on that income as if they still lived in the United States. The destination's tax advantage simply does not reach them.
The Paperwork Is the Real Burden
For many Americans abroad the heavier weight is not the tax. It is the reporting.
FBAR. Any US person must report foreign financial accounts if their aggregate value exceeded $10,000 at any time during the year. For someone who lives abroad and banks locally, that threshold is easily crossed.
Form 8938 under FATCA. Americans living abroad must also report specified foreign financial assets on Form 8938 above higher thresholds: for an unmarried person, more than $200,000 on the last day of the year or more than $300,000 at any time; for a married couple filing jointly, more than $400,000 or $600,000.
Foreign investment funds. A US person holding shares in a passive foreign investment company, a category that catches many non-US mutual funds and ETFs, may have to file Form 8621 for distributions, disposals or certain elections. For an American investing through a local bank in their new country, this is often where the trouble starts.
The Organ paper looked at why Americans renounce citizenship, using administrative tax data. Its conclusion is telling: the rise in renunciations is driven mainly by people who have lived abroad for many years, and these renunciations are "primarily a response to increased compliance costs, not tax liabilities." It is the forms, not the bill, that push people out.
Tax Treaties Do Not Solve It
It is natural to assume that a tax treaty between the United States and your new country would settle the question. It usually does not. US treaties contain a saving clause. The US Treasury's Model Income Tax Convention puts it in Article 1(4): the convention "shall not affect the taxation by a Contracting State of its residents ... and its citizens."
In plain language, the United States reserves the right to tax its citizens as if the treaty did not exist, apart from a list of specific exceptions. The treaty helps with double taxation relief and some particular items. It does not turn an American into a non-resident for US tax purposes.
The Only Exit: Renunciation
Because the tax follows the passport, the only way to leave the system entirely is to give up the passport. Two changes and two sets of figures matter in 2026.
The fee has come down. A final rule published in the Federal Register on 13 March 2026 reduced the fee for processing a Certificate of Loss of Nationality from $2,350 to $450, effective 13 April 2026.
The exit tax has not. Under section 877A of the Internal Revenue Code, a person who renounces is a "covered expatriate" if any one of three tests applies, as the IRS explains:
- their average annual net income tax for the five years before expatriation exceeds an inflation-adjusted amount, which is $211,000 for 2026 according to Revenue Procedure 2025-32
- their net worth is $2 million or more on the date of expatriation
- they fail to certify on Form 8854 that they have complied with all federal tax obligations for the previous five years
A covered expatriate is treated as having sold their worldwide assets the day before expatriation. For 2026, the gain that would otherwise be taxed under that deemed sale is reduced by $910,000. The mechanics are covered in The Tax on Leaving.
The third test is the one that catches people who are not wealthy. An American who has lived abroad for years without filing can become a covered expatriate simply by being unable to certify five years of compliance. Getting compliant comes before renouncing, not after.
Renunciation also does not end every US tax connection. A former citizen who keeps US assets can still face US tax on them, including the estate tax on US-situated assets described in The 40% Ghost.
The Organ paper gives a sense of scale for the past: between 2005 and 2018, more than 35,000 people with at least $48 billion of combined reported net worth renounced US citizenship.
Will Congress Change It?
Proposals to move the United States to residence-based taxation come up regularly. The most recent formal bill, the Residence-Based Taxation for Americans Abroad Act, was introduced as H.R. 10468 by Representative Darin LaHood on 18 December 2024 and referred to the House Ways and Means Committee. It was introduced two weeks before the end of the 118th Congress and did not advance.
As of August 2026, citizenship-based taxation remains the law. Any relocation plan for an American should be built on the rules as they stand, not on a reform that has not passed.
What This Means If You Are Planning a Move
For an American, the implications are direct:
- Choose destinations for life, not for tax. A zero-tax country removes the local tax but not the US tax. The foreign tax credit works best in countries with ordinary tax levels.
- Separate earned and unearned income. The exclusion only helps with earned income. Investment income and pensions stay taxable.
- Set up your banking and investments with US reporting in mind. Foreign funds can trigger PFIC rules. Every account counts towards FBAR.
- Keep records of days abroad. The physical presence test counts full days, and the same records support your residence position in the new country, as described in the paper trail that proves residency.
- If renunciation is on the table, plan it years ahead. Five years of compliance, a clear net worth picture, and a second citizenship already in hand.
For non-Americans the lesson is quieter but real. If anyone in your family holds US citizenship, these rules travel with them. A two-passport family that includes a US passport has to plan around that passport, whatever the other one says.
Work with Sebastian
If you are an American planning a move abroad, or a family with one US citizen in it, and you want the tax and reporting picture clear before you commit, book a consultation.
