As a U.S. citizen living abroad—whether in Hong Kong, China, or Macau—you may wonder how to handle “us expat investment income rules” without missing out on crucial family benefits or triggering unnecessary IRS scrutiny. Managing dividends, capital gains, and other passive income can be intimidating. However, familiarizing yourself with key regulations and knowing how to claim child-related deductions can help you avoid double taxation, save money, and ensure a stress-free filing season.
Understand US expat investment income rules
U.S. tax law generally applies to you on your worldwide income regardless of where you live. This means any profits you earn from foreign investments, dividends, or other passive sources must be reported to the IRS. You also face additional reporting requirements, such as filing Form 8938 for certain foreign financial assets, and FinCEN Form 114 (FBAR) for accounts over $10,000 in total. These extra steps can feel overwhelming, but they are crucial to remain compliant and steer clear of penalties.
For more details on how taxes apply to your global financial activities, see our guide on investment income taxation US expat.
Recognize capital gains taxation
Short-term vs long-term gains
When you sell assets held for 12 months or less, those gains are taxed as ordinary income at rates between 10% and 37%. If you hold an asset for longer than 12 months, you may qualify for preferential long-term capital gains rates of 0%, 15%, or 20%. In some cases, a 3.8% Net Investment Income Tax also applies if your modified adjusted gross income exceeds $200,000.
You may qualify for the Foreign Tax Credit (FTC) to offset some of your U.S. tax liability if you paid capital gains tax in your country of residence. The degree to which that credit applies depends on how much foreign tax you paid, as well as your total U.S. taxable income.
Foreign tax credit relief
Many U.S. expats worry about paying two sets of taxes on one source of income. Fortunately, the U.S. provides the FTC to prevent double taxation for investors paying foreign taxes on eligible income. You claim it via Form 1116, although in certain cases you may qualify to file the credit directly on Schedule 3 of Form 1040. The credit is dollar-for-dollar up to the amount of U.S. tax owed on the same income, but does not erase the 3.8% Net Investment Income Tax if you are a higher earner.
Handle dividend income abroad
Dividend income from foreign corporations can be taxed as either qualified or nonqualified dividends. Qualified dividends typically benefit from the preferential long-term capital gains tax rates, but many foreign companies do not meet the IRS definition of a qualified entity. As a result, you are more likely to pay higher ordinary income rates on these dividends.
To explore the process for reporting dividends properly, see our resource on US expat tax on dividends.
What qualifies as a qualified dividend?
To be “qualified,” the dividend must be paid by a U.S. corporation or certain qualified foreign corporations, and you must meet specific holding period requirements. Because most foreign dividends fail these tests, you should plan for tax at your ordinary income rates unless you can confirm otherwise.
Review PFIC guidelines
Passive Foreign Investment Companies (PFICs) include many foreign mutual funds, ETFs, and pooled investments. They come with strict U.S. reporting and often punitive taxes if not managed properly. According to Bright!Tax, PFIC rules can drastically reduce your returns and trigger high interest penalties when distributions or capital gains are realized.
If you think your holdings could be categorized as PFICs, review PFIC rules for US expats for a deeper understanding of potential tax outcomes.
Identifying PFIC triggers
A PFIC is typically any foreign corporation that receives at least 75% of its gross income from passive sources, or at least 50% of its assets produce passive income (like dividends or interest). Investors often discover they own PFICs unwittingly, so work with a professional knowledgeable in PFIC tax implications US expats to avoid surprises.
Claim child-related tax benefits
If you are a U.S. expat parent, remember that your children may help you qualify for family-related tax breaks, including the Child Tax Credit (CTC). To claim these benefits, your child typically must be a U.S. citizen or resident and have a valid Social Security Number (SSN). If they do not qualify for an SSN, consider whether they may be eligible for an Individual Taxpayer Identification Number (ITIN).
Meeting eligibility requirements
- Your dependent child generally must be under age 17 at the end of the tax year.
- You must provide over half of their support and claim them as a dependent on your return.
- The child must have a valid SSN (or ITIN if applicable) to be considered for the CTC.
Because U.S. taxation is based on worldwide income, you must also determine if adding your child as a dependent reduces your foreign tax credit or foreign income exclusions. In many cases, it still benefits you to claim them, but confirm your specific numbers with a tax advisor.
Filing from abroad
As an expat, you get an automatic two-month filing extension (typically until June 15). If you still need more time, you may request an additional extension until October 15. You can file electronically from overseas to streamline the process, but remember to check local rules in Hong Kong, China, or Macau regarding how foreign income is taxed, especially if you own assets or hold local bank accounts.
Frequently asked questions
- Do I need to file from abroad?
Yes. U.S. citizens and Green Card holders must file annual returns if their income surpasses certain thresholds, even when living outside the United States. - Can I claim the Foreign Earned Income Exclusion (FEIE) and Child Tax Credit together?
You can claim the Child Tax Credit (or Additional Child Tax Credit) even if you use the FEIE for your wage income. Just note that you cannot claim the Foreign Tax Credit on income already excluded under the FEIE. - What if I sold my principal residence abroad?
You may be eligible for the Section 121 exclusion (up to $250,000 or $500,000 if married filing jointly) on any gain, provided you meet the residency and ownership requirements.
Key takeaways
- You must report global investment income—even if you live overseas—and stay mindful of special rules for dividends, capital gains, and PFICs.
- The Foreign Tax Credit can reduce your U.S. tax bill, but it does not always cover the additional 3.8% Net Investment Income Tax for high earners.
- PFIC compliance is critical if you hold foreign mutual funds or pooled investments—check carefully to avoid punitive taxes.
- Claiming children on your U.S. tax return can yield valuable benefits like the Child Tax Credit, provided your child has a valid SSN or ITIN and meets other eligibility rules.
- Filing from abroad includes extra steps like FBAR and FATCA reporting for foreign accounts and assets.
If you need tailored advice to navigate these nuances, American Pacific Tax is here to guide you. We provide personalized, expert help so you can focus on your family and your life abroad—without worrying about the IRS. Feel free to reach out for a consultation and let us simplify your U.S. tax process.