An American in Europe: My Journey to Smarter Tax Planning

The Day My Tax Reality Hit Me in Paris

When I first landed in Paris, my thoughts weren’t about taxes. They were about croissants, winding cobblestone streets, and the thrill of living in Europe. But a few months later, while sipping espresso in Rome and casually checking my email, I found a message from the IRS that brought me back down to earth.

That was when I learned the hard truth: being a U.S. citizen abroad doesn’t free you from the IRS. Whether you live in New York, Madrid, or Berlin, you still have to plan for U.S. taxes.

Why Tax Planning Matters for U.S. Citizens in Europe

Unlike most countries, the U.S. taxes based on citizenship, not residency. This means:

• You must file a U.S. tax return every year, even if you’ve lived abroad for decades.
  
  
• Your income in Europe—whether from work, investments, or rental properties—is reportable to the IRS.
  
  
• Failing to plan ahead could lead to double taxation, penalties, and unnecessary stress.
  
  

My First Lessons in Expat Tax Planning

1. Understanding Tax Treaties

Europe isn’t a single country—it’s a patchwork of nations, each with its own tax rules. Thankfully, the U.S. has tax treaties with most European countries.

• In France, my wages were taxed locally first, then credited in the U.S.
  
  
• In Germany, I learned that pensions are treated differently.
  
  
• In Italy, I had to pay attention to foreign asset reporting rules.
  
  

Tax treaties helped me avoid double taxation, but only because I filed the right forms.

2. Using the Foreign Earned Income Exclusion (FEIE)

One of my biggest discoveries was the Foreign Earned Income Exclusion. For 2024, it lets expats exclude up to $126,500 of foreign income from U.S. taxes.

But here’s the catch: you need to pass either the Bona Fide Residence Test or the Physical Presence Test. Missing a day could disqualify you.

3. Claiming the Foreign Tax Credit (FTC)

Not every situation is solved with the FEIE. When I worked briefly in Spain and paid high local taxes, the Foreign Tax Credit saved me. It allowed me to offset my U.S. liability with taxes I’d already paid to Spain.

4. Remembering FBAR and FATCA

My French bank account wasn’t just for croissants—it also came with IRS reporting requirements.

• FBAR (FinCEN Form 114): Required if my foreign bank accounts totaled more than $10,000 at any point in the year.
  
  
• FATCA (Form 8938): Required if my foreign financial assets exceeded certain thresholds.
  
  

Forgetting these could have meant penalties of $10,000 or more.

Tax Planning Strategies I Wish I Knew Earlier

1. Keep detailed records of income in both U.S. dollars and local currency.
   
   
2. Consider retirement contributions—European pension schemes may not be fully tax-favored under U.S. law.
   
   
3. Think about timing income (bonuses, dividends, or asset sales) to align with both U.S. and local tax rules.
   
   
4. Plan for exit taxes if you ever consider giving up U.S. citizenship.
   
   
5. Work with an expat tax advisor—worth every penny for peace of mind.
   
   

FAQs: Tax Planning for Americans in Europe

Q1: Do I really need to file U.S. taxes if I’ve lived abroad for 20 years?
 Yes. As long as you are a U.S. citizen or Green Card holder in Europe, filing is mandatory.

Q2: Can I be taxed twice?
 It’s possible, but with proper planning using FEIE, FTC, and treaties, you can usually avoid it.

Q3: What happens if I never filed?
 The IRS Streamlined Amnesty Program lets expats catch up on past returns without huge penalties.

Q4: Do self-employed expats have extra tax obligations?
 Yes. You may owe U.S. self-employment tax even if you already contribute to European social security.

Q5: What’s the biggest mistake Americans in Europe make?
 Assuming they don’t have to file in the U.S. once they pay local taxes. That’s not true—you must file both.

Final Thoughts

Living in Europe as an American is a dream—whether it’s Paris, Madrid, or Prague, each city brings culture, history, and opportunity. But with that dream comes responsibility: staying compliant with the IRS.

The good news? With the right tax planning—leveraging exclusions, credits, and treaties—you can enjoy life abroad without tax headaches.

The best advice I can give from experience: don’t wait until tax season to think about taxes. Plan ahead, stay organized, and you’ll keep both the IRS and your peace of mind in check.