The United States taxes its citizens and green-card holders on worldwide income no matter where they live, so an American who moves to Lisbon or Toronto keeps filing Form 1040 every year. Moving abroad changes which credits and exclusions apply; it does not change the obligation to file.[IRS Publication 54, Tax Guide for US Citizens and Resident Aliens Abroad, 2026-07] Almost every other country taxes by residence: leave, cut ties, and the home filing stops. The US model follows the passport.
Our read: the cash tax bill for an American abroad in a treaty country is usually small or zero once the foreign tax credit runs, because the local tax is higher than the US tax. The expensive mistakes are the disclosure forms, which carry five-figure penalties independent of any tax owed, and the PFIC regime, which can turn an ordinary Canadian mutual fund into the worst-taxed asset an American can hold. Get the forms filed and keep non-US funds out of your taxable accounts; those two moves neutralize most of the risk.
The filing that follows you
An American abroad files the same Form 1040 as an American in Ohio, reporting salary, rent, dividends, and gains from every country. Two relief mechanisms keep that from meaning full double tax: the foreign tax credit on Form 1116, offsetting US tax dollar for dollar with income tax paid abroad, and the foreign earned income exclusion, which removes a capped amount of foreign salary. The mechanics, and why the credit beats the exclusion for anyone with property income, are in the Form 1116 guide.
The calendar shifts: a taxpayer whose tax home is outside the US on April 15 gets an automatic extension to June 15, though interest runs on unpaid tax from April 15.[IRS Publication 54, When To File and Pay, 2026-07] The obligation itself never lapses. The only exits are death and formal expatriation, covered below.
The 1040 is only the visible layer. Underneath sit two disclosure regimes with separate thresholds and penalty stacks; neither cares whether you owed a dollar of tax.
FBAR and Form 8938: two disclosure nets, two owners
The FBAR (FinCEN Form 114) and Form 8938 look like duplicates and are not: one reports to the Treasury’s financial-crimes arm, the other to the IRS, and filing one does not satisfy the other.[IRS, Instructions for Form 8938, comparison of Form 8938 and FBAR requirements, 2026-07]
The FBAR catches almost everyone first. A US person whose foreign financial accounts together exceed $10,000 USD at any point in the year must file, including signature-authority accounts, joint accounts, and the checking account that pays a foreign property’s utility bills.[IRS, Report of Foreign Bank and Financial Accounts (FBAR), 2026-07] A retiree with EUR 7,000 in a Portuguese current account and EUR 4,000 in savings crosses the line. The form goes to FinCEN, not with the tax return, due April 15 with an automatic extension to October 15.
Form 8938 is the FATCA-side disclosure, attached to the 1040 itself, with higher thresholds that depend on where you live and how you file:
| FBAR (FinCEN Form 114) | Form 8938 (FATCA) | |
|---|---|---|
| Filed with | FinCEN, separate from the tax return | The Form 1040 itself |
| Threshold, living abroad | US$10,000 aggregate, any time in the year | Single: US$200,000 year-end or US$300,000 any time. Joint: US$400,000 / US$600,000 |
| Threshold, living in the US | Same US$10,000 | Single: US$50,000 / US$75,000. Joint: US$100,000 / US$150,000 |
| What it reaches | Foreign financial accounts, including signature authority | Accounts plus directly held foreign stock, foreign partnership interests, foreign life insurance with cash value |
| Base penalty for not filing | US$10,000 statutory per non-willful violation, inflation-indexed | US$10,000, plus up to US$50,000 more for continued failure after IRS notice |
| Willful / aggravated tier | Greater of US$100,000 (indexed) or 50% of the account balance, per account per year | 40% accuracy penalty on understatements tied to undisclosed assets |
Form 8938’s “living abroad” thresholds require a tax home outside the US plus bona fide foreign residence or 330 days of physical presence abroad. An American who buys in Mexico but keeps US residence is on the low stateside thresholds, where one foreign brokerage account can trigger the form.
The penalties in practice
The FBAR’s statutory penalties are inflation-indexed each January, putting the non-willful cap above $16,500 USD per violation and the willful floor above $165,000 USD.[IRS, Report of Foreign Bank and Financial Accounts (FBAR), civil penalty provisions adjusted annually for inflation, 2026-07] The Supreme Court’s 2023 decision in Bittner v. United States capped the non-willful penalty at one per unfiled report rather than one per account, taking the worst-case math for honest mistakes from six figures to five.[Bittner v. United States, 598 U.S. 85 (2023), 2026-07] Willful violations still run per account, per year, and reckless disregard counts as willful. FATCA is the enforcement engine: foreign banks report American-held accounts to the IRS directly, so the odds an unreported Portuguese account stays invisible round to zero.
For the American who has lived abroad for years without filing, the IRS runs the Streamlined Foreign Offshore Procedures: three years of returns, six years of FBARs, a non-willfulness certification, and no penalty when qualifying from abroad.[IRS, Streamlined Filing Compliance Procedures, 2026-07] Coming forward before the IRS writes first is the difference between a paperwork exercise and a penalty negotiation.
The PFIC trap: Canadian funds, ETFs, and the TFSA
The disclosure forms cost paperwork. The passive foreign investment company rules cost real money, and land hardest on Americans in Canada.
A PFIC is any foreign corporation earning mostly passive income or holding mostly passive assets, a description that captures nearly every non-US pooled investment: Canadian mutual funds, Canadian-listed ETFs, and most European UCITS funds. The default treatment under section 1291 is punitive by design. Gains and “excess distributions” are spread across the holding period, taxed at the top ordinary rate for each year (37% currently), then charged underpayment interest on the deferral, with no capital-gains rate available.[IRS, Instructions for Form 8621, taxation of excess distributions under section 1291, 2026-07] Hold a Toronto-listed index ETF for ten years and the sale is not a long-term gain; it is a decade of throwback tax plus interest, computed fund by fund on Form 8621.
A narrow filing exception: a shareholder whose combined PFIC holdings stay at or below $25,000 USD at year-end ($50,000 USD on a joint return) skips the annual information section of Form 8621, provided there was no distribution or sale that year.[IRS, Instructions for Form 8621, exception for shareholders with aggregate PFIC stock of $25,000 or less, 2026-07] It defers paperwork, not tax; the section 1291 math still applies when you sell. Two elections can defang the regime: a QEF election where the fund publishes the required annual statement (some Canadian ETF sponsors do), and mark-to-market for exchange-listed funds. Both work best from year one; neither rescues a fund already held for years.
The TFSA compounds the problem. The Canada-US treaty gives RRSPs explicit deferral in Article XVIII; it says nothing about TFSAs, so every dollar of interest, dividends, and gains inside one is currently taxable on the 1040. “Tax-free” stops at the border. Worse, a TFSA can be read as a foreign grantor trust, dragging Forms 3520 and 3520-A into the filing stack; the IRS exempted certain tax-favored foreign trusts from those forms in Revenue Procedure 2020-17, but a general-purpose TFSA does not fit cleanly and practitioners are split.[IRS Revenue Procedure 2020-17, exemption for certain tax-favored foreign trusts, 2026-07]
The practical rule for a US person investing from Canada or Europe: hold US-domiciled ETFs and individual stocks in taxable accounts, use the RRSP freely, and treat the TFSA and local fund platforms as off-limits until a cross-border advisor prices the alternative. The Canadian-resident view of the same accounts: the TFSA and RRSP guide.
Why the treaty doesn’t save you
Every US tax treaty contains a saving clause, Article XXIX(2) in the Canada-US instrument, preserving the US right to tax its own citizens as if most of the treaty did not exist.[Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital, Article XXIX(2), 2026-07] What protects a US citizen abroad from double taxation is the foreign tax credit, not the treaty; the clause, its carve-outs for pensions and social security, and the Form 8833 disclosure rules are covered in how tax treaties work and, for the Canadian pair, the Canada-US treaty guide.
The only real exit: renunciation and the section 877A toll
Citizenship-based taxation ends when the citizenship does. Renouncing means an appointment at a US consulate, an oath, and a Certificate of Loss of Nationality; the State Department cut the processing fee from $2,350 USD to $450 USD effective April 13, 2026, ending the highest renunciation fee in the world.[US Department of State, Schedule of Fees for Consular Services final rule, Federal Register doc. 2026-04931, 2026-07]
The tax side is section 877A. A renunciant becomes a covered expatriate, owing the exit tax, on any of three triggers: net worth of $2,000,000 USD or more on the expatriation date, average annual net US income tax liability above $206,000 USD for the five prior years (2025 figure, indexed), or failure to certify five years of full US tax compliance on Form 8854.[IRS, Instructions for Form 8854, covered expatriate tests and section 877A exclusion amount, 2026-07] A covered expatriate is treated as having sold everything at fair market value the day before expatriating, with the first $890,000 USD of deemed gain excluded (2025, indexed). The third trigger is the trap: a wealthy but compliant retiree can renounce without exit tax, while a modest-net-worth American who never filed becomes covered by default. The five years of compliance come first; renunciation erases future obligations, never past ones.
The one-way door has costs beyond tax (US visa requirements to visit, estate-tax exposure on future gifts to US persons); the decision deserves professional counsel, not a web page.
Who this page is the wrong frame for
Green-card holders live under most of the same rules while the card is valid, but the exit differs: a long-term resident (card in 8 of the last 15 years) faces the same section 877A regime on abandoning it, and claiming treaty non-residence can itself trigger expatriation treatment. Non-resident aliens married to Americans have a different problem set, starting with whether to elect joint filing. Canadians with no US status face none of this; their departure cost is the deemed disposition covered in the Canadian departure tax guide. If your question is which country considers you resident in the first place, start with the residency rules.
FAQ
I pay more tax in Canada than I would in the US. Do I still owe anything?
Usually no cash tax: the foreign tax credit absorbs the US liability and banks the excess as a carryforward. You still owe the filings. FBAR and Form 8938 penalties attach to the missed form, not to unpaid tax, and a zero-balance return can still carry a five-figure disclosure penalty.
Is my RRSP as dangerous as my TFSA?
No. The treaty defers US tax on RRSP growth until withdrawal, so the account works as intended even for a US person. It still appears on the FBAR and Form 8938, and the PFIC question inside an RRSP is moot while the deferral holds. The TFSA gets no such protection.
I’ve lived abroad for a decade and never filed. How bad is it?
If the failure was non-willful, the Streamlined Foreign Offshore Procedures resolve it with three years of returns, six years of FBARs, and no penalty. Most owe little or no back tax once the foreign tax credit runs. The window closes if the IRS contacts you first.
Does renouncing citizenship erase my old tax debts?
No. Renunciation ends future obligations from the expatriation date. Past unfiled returns, unpaid tax, and unfiled FBARs survive it, and Form 8854’s compliance certification forces the catch-up; failing to certify makes you a covered expatriate regardless of income or net worth.
Where to go next
Country cost detail lives in the American-buyer tax pages for Mexico and Portugal. For the relief machinery, the Form 1116 foreign tax credit guide; for the treaty layer, how tax treaties work; the rest of the library is at the taxes hub.
Disclaimer
This article is for informational purposes only and does not constitute tax advice. Tax laws change frequently and individual circumstances vary. Consult a qualified cross-border tax advisor before making decisions based on this information. CrossingHQ does not provide tax preparation, advice, or representation services.
Current as of 2026-07-23. We review tax content quarterly and update on rule changes. To report an error, contact us.