Expat Tax Policy Changes: What Americans Abroad Need to Know About the Rules and Planning Strategies

The disconnect between what expats hear about tax policy changes and what actually affects their filing obligations creates costly compliance gaps every year. Social media posts claim citizenship-based taxation is ending. Forum discussions suggest the IRS has backed off on foreign account enforcement. LinkedIn threads promise massive relief for Americans overseas. None of these narratives match the actual policy landscape in 2026.

The reality of expat tax policy changes in 2026 is more nuanced than headlines suggest. Some provisions have shifted – estate tax exemptions increased permanently to $15 million under the One Big Beautiful Bill Act, certain foreign business income rules have tightened, and enforcement priorities have evolved with increased IRS funding. But the fundamental structure of U.S. taxation for Americans abroad remains unchanged. You’re still filing. You’re still reporting foreign accounts. You’re still navigating citizenship-based taxation.

Here’s what actually changed. The 2026 Foreign Earned Income Exclusion sits at $132,900, up from $130,000 in 2025 due to inflation adjustments. The estate tax exemption increased permanently to $15 million per individual effective January 1, 2026, with annual inflation adjustments thereafter – this represents a significant shift from the anticipated sunset that would have dropped the exemption to approximately $7 million. GILTI rules affecting foreign corporations have evolved, creating planning requirements for expat business owners. Cryptocurrency reporting has expanded significantly with enhanced enforcement focus.

What hasn’t changed? Citizenship-based taxation remains. The U.S. still taxes citizens on worldwide income regardless of residence location. FBAR filing requirements stay at $10,000 aggregate threshold. FATCA reporting continues unchanged. The physical presence test still demands 330 days abroad. These fundamentals haven’t moved despite policy shifts elsewhere.

After handling expat tax compliance for fifteen years across diverse international situations, the pattern of questions in 2026 reflects specific policy pressure points. The permanent estate tax exemption at $15 million creates different planning dynamics than the rushed gifting environment of 2025. GILTI implications force business structure reevaluation for Americans operating foreign entities. Cryptocurrency reporting requirements demand attention from expats holding digital assets. Enhanced enforcement capabilities change the risk calculation around voluntary disclosure timing.

Understanding what actually changed versus what stayed the same determines whether you’re filing correctly and avoiding penalties that start at $10,000 and climb quickly. The difference between consuming social media narratives and understanding actual policy implementation affects your tax liability and compliance exposure.

Expat Tax Policy: What Hasn’t Changed (And Why That Matters)

Before diving into policy shifts, you need to understand the bedrock that hasn’t moved. Too many expats confuse political rhetoric about tax reform with actual legislative changes affecting Americans abroad. The fundamentals of expat taxation remain locked in place through 2026 and beyond.

Citizenship-based taxation continues without modification. The U.S. taxes your worldwide income regardless of where you live, where you work, or which country considers you a resident. This puts Americans abroad in a unique position compared to citizens of nearly every other developed nation, which use residence-based taxation.

Key points about citizenship-based taxation:

• Location irrelevant. If you’re a U.S. citizen working in London, you file U.S. tax returns reporting your UK salary
• Long-term residence doesn’t matter. Living in Tokyo for 20 years and only visiting the U.S. occasionally still requires annual U.S. filing
• Citizenship triggers obligation. Your U.S. citizenship creates the filing requirement, not your residence location

FBAR filing requirements haven’t budged from the $10,000 aggregate threshold. If your foreign financial accounts exceed $10,000 in aggregate at any point during the year, you file FinCEN Form 114 by October 15th.

FBAR compliance requirements:

• Aggregate threshold. $10,000 combined across all foreign accounts at any time during the year
• Automatic extension. April 15th deadline extends automatically to October 15th with no request needed
• Account types covered. Checking, savings, investment accounts, and certain retirement accounts at foreign financial institutions
• Severe penalties. Up to $10,000 per year for non-willful violations; greater of $100,000 or 50% of account balance for willful violations

FATCA reporting through Form 8938 maintains unchanged threshold structures. These thresholds haven’t increased despite inflation, meaning more expats cross them each year as account balances grow through investment returns and currency fluctuations.

Form 8938 filing thresholds for expats living abroad:

• Single filers. File when foreign assets exceed $200,000 on December 31st OR $300,000 at any time during the year
• Married filing jointly. File when foreign assets exceed $400,000 on December 31st OR $600,000 at any time during the year
• Higher thresholds than FBAR. Different reporting requirements mean you may need to file FBAR but not Form 8938, or both

The foreign earned income exclusion mechanics remain unchanged. You still qualify through the physical presence test (330 days abroad in any 12-month period) or the bona fide residence test (establishing genuine residence in a foreign country for an uninterrupted period including a full tax year). The housing exclusion still layers on top of the FEIE for qualifying expenses.

What hasn’t changed about FEIE:

• Qualification tests unchanged. Physical presence test or bona fide residence test remain the only paths
• Only covers earned income. Doesn’t apply to dividends, interest, capital gains, rental income, or pension distributions
• Housing exclusion still available. Additional exclusion for qualifying housing expenses beyond the FEIE amount

Understanding what hasn’t changed matters because expats make costly decisions based on misunderstanding the current environment. Some taxpayers stop filing after reading that “tax reform is coming for expats,” assuming changes are imminent and non-filing will be forgiven in future amnesty. Years later, they face delinquent filing procedures and potential penalties on unreported foreign accounts.

The stability in core requirements means your fundamental compliance obligations haven’t lightened. You’re still filing by April 15th (or October 15th with extension). You’re still reporting worldwide income. You’re still disclosing foreign accounts and assets. The baseline filing burden for Americans abroad hasn’t decreased regardless of policy changes in specific areas.

The Policy Shifts Expats Actually Face

While core structures remain stable, several policy areas have evolved in ways that directly impact Americans living abroad. These changes don’t eliminate your filing obligations, but they do change how you calculate tax, what strategies remain viable, and where enforcement focuses.

The One Big Beautiful Bill Act permanently increased the estate and gift tax exemption. This represents the most significant shift affecting expats with substantial assets. Instead of the anticipated sunset that would have dropped the exemption to approximately $7 million, the OBBBA permanently increased it to $15 million per individual effective January 1, 2026.

Key OBBBA estate tax changes:

• Permanent increase to $15 million. Up from $13.99 million in 2025, effective January 1, 2026
• Annual inflation adjustments. Amount will increase each year beginning in 2027 using 2025 as base year
• No sunset provision. Unlike TCJA provisions, this increase doesn’t expire automatically
• Eliminates gifting urgency. The rush to complete gifting before December 31, 2025 no longer necessary
• Foreign assets fully included. Real property outside the U.S., foreign business interests, and foreign accounts all count toward taxable estate

GILTI rules affecting controlled foreign corporations have become a central concern. Owning more than 50% of a foreign corporation creates potential GILTI inclusion on certain foreign earnings regardless of whether the corporation distributes dividends.

How GILTI impacts expat business owners:

• Automatic inclusion. Certain foreign earnings taxed even without distributions to you
• Starting 2026: Higher rates. Effective GILTI rate increases from 10.5% to 12.6% due to OBBBA changes
• Limited foreign tax credits. Only 80% of foreign taxes provide U.S. benefit (increasing to 90% in 2026)
• High-tax exception available. Foreign rates exceeding 18.9% can qualify for exclusion
• Section 962 election option. Allows taxation at corporate rates rather than individual rates

Cryptocurrency and digital asset reporting requirements have expanded dramatically. The infrastructure bill passed in late 2021 continues rolling out implementation provisions affecting expat crypto holders.

Crypto reporting changes:

• Direct Form 1040 question. You must answer whether you had digital asset transactions
• Broker reporting expanded. Foreign exchanges face new reporting requirements flowing information to IRS
• FBAR applies to crypto. Foreign exchange accounts holding crypto count toward $10,000 FBAR threshold
• Enhanced enforcement. Penalties for failing to report crypto transactions apply equally to overseas accounts

IRS enforcement priorities have shifted noticeably. The agency received significant funding increases through the Inflation Reduction Act, with a portion targeting international compliance.

Enhanced enforcement areas:

• Foreign account violations. Increased audit rates for FBAR and FATCA non-compliance
• Cryptocurrency focus. Heightened scrutiny on unreported digital asset transactions
• GILTI structures. Business structures designed primarily for tax avoidance face more attention
• Better data matching. Over 110 FATCA agreements mean IRS receives account information directly from foreign institutions

These shifts create planning urgency in specific areas while leaving general compliance obligations unchanged. You’re not escaping the filing requirement, but you may need to restructure foreign businesses, adjust estate planning strategies, or update cryptocurrency reporting protocols.

Foreign Earned Income Exclusion: 2026 Numbers and Strategy

The Foreign Earned Income Exclusion for 2026 sits at $132,900, up from $130,000 in 2025 and $126,500 in 2024. These annual inflation adjustments mean you can exclude more earned income from U.S. taxation each year, but the qualification requirements and strategic considerations around the FEIE haven’t changed.

Two paths to qualify for FEIE:

• Physical Presence Test. Requires presence in foreign countries for 330 full days during any 12-month period. Days don’t need to be consecutive, and the 12-month period doesn’t need to align with the calendar year. Time in U.S. airspace or waters counts against qualification. Missing the 330-day requirement by even a few days disqualifies the exclusion
• Bona Fide Residence Test. Requires demonstrating genuine residence in a foreign country for an uninterrupted period that includes an entire tax year. More subjective than physical presence but potentially more valuable for expats who maintain some U.S. presence while living primarily abroad

What the $132,900 exclusion covers:

• Earned income only. Wages, salaries, professional fees, and self-employment income from services you personally performed
• Doesn’t cover passive income. No exclusion for dividends, interest, capital gains, rental income, or pension distributions
• Service-based requirement. IRS distinguishes clearly between compensation for services and returns on capital

Housing exclusion adds additional benefits. For 2026, you can exclude housing costs exceeding 16% of the FEIE amount (approximately $21,264) up to a maximum of 30% of the FEIE (approximately $39,870) for most locations.

Qualifying housing expenses include:

• Rent payments
• Utilities (except telephone)
• Real and personal property insurance
• Residential parking
• Furniture rental

Non-qualifying expenses:

• Lavish or extravagant expenses
• Purchased furniture
• Mortgage interest

Strategic FEIE considerations have evolved with remote work patterns. Expats working for U.S. employers while living abroad qualify for the FEIE if they meet the physical presence or bona fide residence tests. But the explosion of remote work since 2020 has created situations where workers maintain closer U.S. ties while living abroad, potentially complicating bona fide residence determinations.

Critical FEIE planning decisions:

• FEIE vs. Foreign Tax Credit analysis. In high-tax jurisdictions, reporting all income and claiming credits may produce better results than excluding $132,900
• Five-year revocation lock. If you claim FEIE and then revoke it, you can’t claim it again for five years without IRS permission
• Annual decision. You can choose whether to claim FEIE each year, but revocation carries the five-year penalty
• Can’t double-dip. Using FEIE means you can’t claim foreign tax credits on the excluded income

GILTI Changes Hitting Expat Business Owners

GILTI – Global Intangible Low-Taxed Income – complicates taxation for Americans abroad owning foreign corporations. Control a foreign corporation (over 50%), and you face U.S. tax on certain foreign earnings even without distributions.

How GILTI works:

• Includes income above 10% return on tangible assets. Service businesses with minimal assets – consulting, software, advisory – see almost all earnings under GILTI
• Individual rates without election. Pay ordinary rates up to 37% on GILTI without Section 962 election
• Corporate rates with election. Section 962 election allows taxation at 10.5% effective rate through 2025, increasing to 12.6% in 2026
• Future distribution tax. Section 962 election creates additional tax on distributions as regular income

Foreign tax credit limitations:

• 80% haircut through 2025. Only 80% of foreign taxes provide U.S. benefit
• 90% starting 2026. OBBBA increased foreign tax credit to 90% of foreign taxes paid
• High-tax exception. Applies when foreign rates exceed 18.9%, but it’s all-or-nothing per corporation

Planning considerations for expat business owners:

• Compare structures. Many foreign corporations now create more U.S. tax than sole proprietor status with FEIE
• Check-the-box elections. Converting to disregarded entity eliminates GILTI but means current U.S. taxation
• Form 5471 penalties severe. Start at $10,000 per form with continuation penalties reaching $50,000 per form
• Annual Section 962 decision. Election made year-by-year based on specific circumstances

Estate Tax Under OBBBA: New Planning Landscape for 2026

The estate tax landscape changed fundamentally with passage of the One Big Beautiful Bill Act in July 2025. Instead of the anticipated sunset that would have dropped the exemption to approximately $7 million on January 1, 2026, the OBBBA permanently increased the estate and gift tax exemption to $15 million per individual, with annual inflation adjustments thereafter.

Key changes under OBBBA:

• $15 million per person. $30 million for married couples, effective January 1, 2026
• Permanent increase. No scheduled sunset, though future legislation could still reduce it
• Annual inflation adjustments. Beginning in 2027, using 2025 as base year
• Eliminates 2025 urgency. No need to rush gifting before December 31, 2025 deadline

How foreign assets are treated:

• Foreign real property included. Villa in France, apartment in London, land in Costa Rica – all count toward U.S. taxable estate
• Foreign business interests included. Ownership in foreign corporations, partnerships, and other entities
• Foreign accounts included. Investment accounts at foreign institutions count toward estate value
• Double taxation potential. Some countries impose their own estate taxes, requiring treaty planning

Planning opportunities under permanent exemption:

• Removes artificial deadlines. Can plan strategically rather than reactively
• Lifetime gifting still valuable. Removes future appreciation from taxable estate
• Annual gifts separate. $19,000 per recipient for 2026 doesn’t reduce lifetime exemption
• Married couples can gift $30 million. Combined exemption provides significant wealth transfer capacity

Estate planning actions for 2026:

• Model your estate. Include all worldwide assets – U.S. retirement accounts, foreign real estate, foreign business interests, investment accounts
• Consider trust structures. For estates approaching exemption thresholds, explore irrevocable trust options
• Document domicile carefully. State-level estate taxes still apply based on domicile
• Review beneficiary designations. Ensure estate plan coordinates with retirement accounts and life insurance

Enhanced Reporting and Where Enforcement Focuses

The IRS received significant funding increases, and international compliance represents a major deployment area. Rules haven’t fundamentally changed, but enforcement intensity has increased measurably.

Cryptocurrency reporting has moved from optional to mandatory:

• Form 1040 direct question. Must answer about virtual currency transactions
• Incorrect answers create audit risk. Immediate red flag for IRS examination
• Foreign exchange accounts count for FBAR. If crypto holdings exceed $10,000 aggregate threshold
• Transaction reporting required. Not just account holdings but actual transactions

FBAR enforcement has intensified with better data:

• Automatic information matching. IRS receives data from foreign institutions through FATCA, then matches against FBAR filings
• Discrepancies trigger penalties. Late filing doesn’t escape notice – they already know about accounts
• $10,000 minimum penalty. Per year for non-willful violations
• Severe willful penalties. Greater of $100,000 or 50% of account balance

Form 5471 for controlled foreign corporations faces heightened scrutiny:

• $10,000 initial penalty. Per form, per year for late or incomplete filing
• $10,000 monthly continuation penalty. After IRS notice, up to $60,000 maximum per form
• Multiple forms multiply penalties. If you control three foreign corporations, penalties apply to each
• Indefinite statute of limitations. Returns remain open until Form 5471 filed

PFIC reporting on Form 8621 catches expats holding foreign mutual funds:

• Punitive taxation. Mark-to-market treatment or interest charge on gain deferral
• Failing to file opens statute. Statute of limitations remains open indefinitely
• Common compliance gap. Many expats don’t realize foreign mutual funds trigger reporting

Audit rates have increased for international returns:

• Foreign addresses trigger attention. Higher audit likelihood than domestic-only returns
• Foreign income reported. Any foreign source income increases examination risk
• Multiple international forms. FBAR plus Forms 5471, 8938, 8621 create additional scrutiny
• Voluntary disclosure window narrowing. With improved information flows, IRS discovers issues before taxpayer disclosure

Filing Strategies Under Current Policy

Understanding policy changes means adjusting your filing approach. The current environment demands specific strategic responses based on your situation.

Foreign tax credit vs. FEIE requires annual analysis:

• High-tax jurisdictions. Run calculations both ways to determine optimal strategy
• Countries exceeding 50% rates. Often benefit more from reporting all income and claiming credits than excluding $132,900
• Can’t use both on same income. Choose FEIE or foreign tax credit, not both
• Consider long-term impact. Five-year revocation penalty makes this a strategic decision

Section 962 elections for GILTI need careful evaluation:

• Year-by-year analysis required. Election allows taxation at corporate rates but creates future distribution tax
• Through 2025: 10.5% effective rate. Increases to 12.6% starting 2026
• Can claim foreign tax credits. Up to 80% through 2025, 90% starting 2026
• Must file statement with return. Can’t make election late or through amendment

Physical presence test documentation is critical:

• Keep digital passport copies. All pages showing entries and exits
• Maintain credit card records. Foreign transactions help establish presence
• Don’t rely on reconstruction. Documentation needs to be contemporaneous
• Track carefully when close to 330 days. Each U.S. day counts against qualification

State residency determinations affect total tax burden:

• Document non-residency thoroughly. Foreign housing, foreign driver’s license, foreign voter registration
• California safe harbor requires proof. Must demonstrate you moved abroad for other than temporary purposes
• Maintain no-tax state domicile. Florida, Texas, Nevada require substantial connection to claim
• States audit aggressively. Specifically targeting expats claiming convenient domiciles without substance

Extension filing matters for FEIE qualification:

• Physical presence test can span tax years. 330 days during any 12-month period
• October 15th extension provides time. Additional months to complete 330-day requirement
• Extension extends time to file, not time to pay. Estimated taxes still due by April 15th
• Interest accrues from April 15th. On any unpaid tax liability

Planning Moves to Make Now

Policy changes create windows where action produces outsized benefits. The permanent increase in the estate tax exemption under OBBBA eliminates the artificial urgency that characterized 2025 planning but doesn’t eliminate the value of strategic lifetime gifting. The decisions you make regarding foreign business structures, cryptocurrency compliance, and estate planning will affect your tax liability and compliance exposure for years.

Estate planning deserves continued attention:

• Model your estate comprehensively. Include all worldwide assets – U.S. retirement accounts, foreign real estate, foreign business interests, investment accounts wherever held
• Consider gifting for appreciation removal. Lifetime gifts remove future appreciation from taxable estate even with higher exemption
• Plan strategically, not reactively. No December 31st deadline means better decision-making
• Foreign real estate requires attention. Property in high-growth markets could exceed exemption amounts over time

Foreign business structure review remains essential:

• Run GILTI projections. Compare current foreign corporation structure against alternatives
• Consider check-the-box elections. Converting to disregarded entity may reduce overall tax
• Evaluate sole proprietor with FEIE. Sometimes simpler structure produces better tax result
• Changes take time to implement. Foreign legal requirements and U.S. tax elections must be coordinated

Cryptocurrency holdings require immediate compliance:

• Review all 2026 crypto transactions. Confirm correct reporting on Form 1040
• Verify FBAR inclusion. Foreign exchange accounts holding crypto must be reported if thresholds met
• Check reportable transaction requirements. Some crypto transactions require Form 8886 disclosure
• Enhanced enforcement active. Penalties for non-compliance exceed transaction values triggering them

Foreign tax credit optimization requires multi-year planning:

• Model 3-5 year credit position. For GILTI inclusion or significant foreign source income
• Time elections strategically. Distributions or income recognition in specific years can maximize credit utilization
• Understand basket limitations. Credits can expire unused if in wrong basket
• Carrying forward credits has limits. $50,000 in credits provides no benefit if they expire before use

Physical presence test planning affects multiple years:

• Plan remaining 2026 travel carefully. Each U.S. day counts against 330-day requirement
• Consider 2027 qualification now. Physical presence test measured over any 12-month period, not calendar year
• Coordinate business travel requirements. Prevent disqualification due to poor planning rather than necessity
• Document travel patterns systematically. Keep records contemporaneously rather than reconstructing later

State domicile documentation needs immediate attention:

• Establish no-tax state domicile properly. Florida driver’s license, Florida voter registration, Florida address for all official purposes
• Maintain Florida residence for visits. Ideally own or rent property you use when in U.S.
• Don’t maintain conflicting state ties. No New York addresses or licenses if claiming Florida domicile
• States audit aggressively. Targeting expats claiming convenient domiciles without substance

Delinquent compliance catch-up before IRS contact:

• Streamlined procedures available. Require certifying non-willfulness, filing six years FBARs plus three years amended returns
• Delinquent FBAR submissions. Apply when you have no unreported income
• Must initiate before examination. Programs only work when you come forward first
• After IRS contact, weaker position. Negotiating without program protections

The policy landscape for Americans abroad continues evolving, but the fundamentals remain consistent. You’re filing annually. You’re reporting worldwide income. You’re disclosing foreign accounts and assets. Within that framework, strategic planning around changing provisions – permanent estate tax exemption, GILTI optimization, foreign tax credit management – creates meaningful tax savings and compliance risk reduction.

Schedule a review of your specific situation to evaluate how the 2026 changes affect your planning. The permanent estate tax exemption eliminates artificial deadlines but doesn’t eliminate planning opportunities. Expats across diverse jurisdictions face these exact issues – GILTI structuring, estate planning with the new permanent exemption, foreign tax credit optimization, and compliance catch-up for situations requiring attention.