Managing Global Income Taxation and the U.S. Exit Tax

Recent advancements in technology have made a big world feel like a much smaller place. From air travel to television to the internet, people around the globe have become increasingly connected. In fact, living and working in another country is an opportunity that many ultra-high-net-worth (UHNW) U.S. citizens are either pursuing or contemplating.

Whether moving abroad is for personal or professional reasons, it can come with challenges. For instance, managing taxation on global income and navigating a potential exit tax upon expatriation (i.e., relinquishing U.S. citizenship or long-term residency) require careful planning and consideration of various factors. We’ll take a look at each of these two actions in turn.

1. Taxation of global income

It’s important to note that U.S. citizens are taxed on their worldwide income, regardless of where they reside or where the income is earned. This includes income from a number of sources, such as: 

• Earned income: Salaries, wages, self-employment income
• Passive income: Dividends, interest, capital gains, rental income, royalties
• Other income: Pensions, annuities, distributions from trusts 

Key considerations for the UHNW

UHNW individuals often have intricate financial structures involving multiple income streams and assets, which increase tax complexity. In addition, for UHNW individuals who earn employment income abroad and/or have business interests and investments across different countries, their tax situation becomes even more complicated.

Fortunately, there are a few ways to lower the tax impact of globally derived income. The foreign earned income exclusion (FEIE) may enable U.S. citizens working abroad to exclude a portion of their foreign earned income from U.S. taxes, potentially reducing their U.S. tax liability. For 2025, that excluded portion is $130,000.¹ According to the IRS, foreign earned income includes “wages, salaries, professional fees, or other amounts paid to you for personal services rendered by you.”²

If you’re self-employed, you may be able to claim the FEIE on self-employment income earned in another country. While the excluded amount will reduce your regular income tax, it won’t give you a break on your self-employment tax. If you live in a foreign country, maintain tax residency there and have foreign earned income, you may also qualify for the foreign housing deduction that can help lower your gross income for tax purposes. If you work for an employer rather than being self-employed, you may qualify instead for the foreign housing exemption. Learn more here.

The foreign tax credit (FTC) is another vehicle to reduce tax on foreign-source income. Individuals paying taxes in a foreign country on income that’s also subject to U.S. tax may be able to claim the FTC to mitigate double taxation. However, the FTC can’t be used to reduce U.S. taxes on U.S.-source income. If the taxes you’ve paid or accrued on foreign-source income exceed the FTC limit for a given tax year, you’re allowed to carry over (or carry back) the excess amount to another tax year.

You may also avoid double taxation on foreign-source income through a tax treaty. The U.S. has reciprocal tax treaties with many countries, potentially providing reduced tax rates or exemptions for particular types of income earned in a foreign country. If you earn income in a country that doesn’t have a tax treaty with the U.S., or if the specific tax treaty doesn’t cover a certain form of income, you must pay tax on that income as if it were earned in the U.S.

Keep in mind that UHNW individuals with foreign financial accounts exceeding certain thresholds must report the accounts to the U.S. Treasury Department, even if they don’t generate taxable income. 

Estate considerations

Since the IRS taxes U.S. citizens, Green Card holders and tax residents on their worldwide estate, both U.S. and foreign assets are included in the taxable estate. For U.S. citizens living abroad or owning property and/or investments outside the U.S., these foreign assets (including foreign real estate, bank accounts and business interests) are still subject to U.S. estate tax.

In general, a U.S. person (i.e., U.S. citizen/resident) who is treated as the owner of a foreign trust, foundation or corporation under the grantor trust rules is taxed on the income of that trust. If a U.S. beneficiary receives a distribution from a foreign non-grantor trust, the beneficiary will need to report their share of the trust's distributable net income.

2. U.S. exit tax

Many Americans, whether they’re UHNW or not, have made the decision to leave the U.S. or are considering relocating. Be mindful of potential tax consequences related to such a move. For instance, the U.S. exit tax (also known as the expatriation tax) applies to certain individuals who relinquish their U.S. citizenship or long-term residency, especially those deemed "covered expatriates." 

There are tests that will help determine if you’re considered to have "covered expatriate" status, which means you’ve relinquished your U.S. citizenship. These tests include:

• The net worth test: Net worth exceeding $2 million on the date of expatriation
• The tax liability test: Average annual U.S. income tax liability exceeding a certain threshold (in 2025, the threshold is $206,000)³ for the five years prior to expatriation
• The certification test: Failure to certify compliance with U.S. tax obligations for the five years prior to expatriation 

Key aspects of the U.S. exit tax

For covered expatriates, your assets are treated as if they had been sold (i.e., a “deemed sale”) for their fair market value on the day before expatriation, triggering capital gains taxes on unrealized gains. To help manage the tax obligation related to these capital gains, a portion of the net gain from the deemed sale may be excluded for tax purposes. This is known as the “exclusion amount,” and for 2025, that amount is $890,000.⁴ Additionally, the exit tax may apply to deferred compensation, retirement accounts and interests in non-grantor trusts. 

Planning considerations

To reduce or avoid the exit tax, consider pre-expatriation planning that can help you strategically manage assets and income in the years leading up to expatriation. It’s also crucial to seek professional guidance from experienced tax and financial advisors specializing in international and expatriation tax. A Corient Wealth Advisor may be helpful in this regard, providing advice and connecting you with other internal specialists if required Here are some things to keep in mind:

• Estate planning: Consider the implications of expatriation on estate planning. The IRS determines estate tax residency based on domicile, not just citizenship or physical presence. So, even if a U.S. expatriate has lived abroad for years, they may still be considered domiciled in the U.S. for estate tax purposes if they maintain strong ties to the U.S. For non-residents (i.e., foreigners without U.S. domicile), only U.S.-situated assets are subject to U.S. estate tax.
• Estate tax reduction: For UHNW individuals and U.S. expatriates holding foreign assets, strategies to minimize U.S. estate tax on foreign assets may include:
  • Using the federal estate tax exemption (up to $13.99 million per individual in 2025)⁵
  • Claiming foreign tax credits for estate taxes paid in another country
  • Gifting foreign assets during your lifetime to reduce size of the taxable estate
• Qualified domestic trust (QDOT): For estate tax purposes, non-citizen spouses are not entitled to the typical 100% estate tax marital deduction or portability of the deceased spouse’s unused estate tax exemption (i.e., non-citizen spouses don’t normally benefit from estate tax deferral on the first spouse’s death). Instead, a QDOT must be used for a surviving non-citizen spouse to defer federal estate on assets inherited from a citizen spouse. QDOTs need to have at least one U.S. trustee, and estate tax is paid on principal distributions. Additionally, a U.S. bank must serve as trustee if the estate is over $2 million (otherwise, the trustee must post a bond or letter of credit for 65% of the estate tax liability).
• Gift tax: For covered expatriates, gifts and bequests are subject to a special tax. While standard transfer tax rules impose tax on the donor, this tax is actually imposed on the U.S.-based gift recipient. The gift tax (40% in 2025) applies if the aggregate amount received from a non-resident alien (expatriate/foreign estate) exceeds $100,000 in a given tax year.⁶
• Foreign gifts: U.S. citizens, residents and domestic trusts must report the direct and indirect receipt of covered gifts and bequests (received from January 1, 2025 and later) from covered expatriates. Exceptions include trust transfers to charity and to a spouse.

Since not all countries recognize trusts, an American trust may cause foreign country taxation issues (e.g., in certain countries, trust distributions can be taxed both at the trust and recipient levels). In addition, the legal and asset protection features of U.S. trust structures might not extend to some foreign jurisdictions, which typically don’t treat trusts as distinct legal entities. Expatriates who need trust protection should consider “trust substitutes” like local corporate entities or gifting strategies with the potential to be more tax friendly under their resident country’s specific tax regime. 

¹ https://www.irs.gov/pub/irs-drop/rp-24-40.pdf
² https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion#:~:text=If%20you%20are%20a%20U.S.,taxed%20on%20your%20worldwide%20income.
³ https://www.irs.gov/pub/irs-drop/rp-24-40.pdf
⁴ https://www.irs.gov/pub/irs-drop/rp-24-40.pdf
⁵ https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
⁶ https://www.irs.gov/businesses/gifts-from-foreign-person

ABOUT THE AUTHOR