About a week ago, I was on a consultation with a potential client who had just received a large “you owe tax” love letter from the IRS. The love letter was well above $500,000. Let’s just say the client was freaking out a little bit.
The client was a U.S. citizen who had taken his marketing business and set up shop in Dubai. Throughout the year, he had built his company into a massive cash-flow machine which showed a bottom-line profit of about $1.25 million!
One of the primary reasons the client relocated to Dubai was the UAE’s favorable low-tax environment. So when he received a sizable tax bill from the IRS, he was caught completely off guard. Especially since he had sold all his U.S.-based assets and believed he had fully severed financial ties with the United States.
What the client failed to understand was that U.S. taxation follows you wherever you decide to work or live… on the entire globe. After careful deliberation, I asked the client if he had renounced his U.S. citizenship before leaving for the UAE. Since his answer was NO, I had to inform him that there was very little we could do about the tax bill at this point.
This event triggered me to write this article – to inform everyone about worldwide taxation before making such a move.
Imagine packing your bags, leaving the U.S., and moving to a country with lower living costs, better healthcare, and a more relaxed lifestyle. For many, it sounds like a dream… until tax season rolls around and the IRS reminds you that you still owe Uncle Sam his share, no matter where you live.
The U.S. is one of only a few countries in the world that practice citizenship-based taxation, meaning that as long as you hold a U.S. passport, you are required to report and likely pay taxes on your worldwide income.
This system stands in stark contrast to most other countries, where taxation is based on residency, not nationality.
So what does this mean for Americans living abroad? How does it compare to other countries? And what happens when an American moves to a high-tax country like Sweden, Switzerland, or Denmark?
Let’s break it down.
Hold On! Before we embark on this journey together… I feel the need (the need for speed… I know some of you said it before I did) to throw in the obligatory disclaimer here. This article is full of generalizations and should not be taken as legal advice. It’s written from the perspective of making you, the audience, think about these things prior to making a quick decision and make a move that is not what you intended. My suggestion, as a professional, is that you always consult with your legal counsel and tax strategist before going all in. In addition, in a case like this, you may also want to involve a similar counterpart in the country where you intend to live or work.
Now… let’s break it down. For real this time…
The American Tax Trap: Why U.S. Citizens Can’t Escape the IRS
Unlike most countries, where individuals are taxed based on where they live, the U.S. taxes its citizens no matter where they reside. This means that even if you move abroad, you must still file a U.S. tax return every year.
To make matters worse, failing to file taxes, even if you don’t owe anything, can lead to hefty penalties. Many expats are shocked to learn that even their foreign bank accounts are subject to reporting requirements under the Foreign Account Tax Compliance Act (FATCA). If you have over $10,000 in a foreign account, you must file an FBAR (Foreign Bank Account Report) or risk severe penalties.
However, the U.S. does offer some relief. The Foreign Earned Income Exclusion (FEIE) allows Americans to exclude up to a certain amount of their foreign-earned income from U.S. taxes (adjusted annually for inflation). In 2025, that limit is approximately $130,000 per person.
Additionally, Foreign Tax Credits (FTC) help reduce double taxation by allowing expats to offset U.S. tax liability with taxes paid to their country of residence.
How Other Countries Handle Taxation: The Residency-Based Approach
Most countries follow a residency-based taxation system, meaning you only pay taxes in the country where you live and earn income. For example, Canada does not tax its citizens who live abroad, as long as they establish residency elsewhere and sever major ties with Canada (although they may require a one-time “exit-tax”).
Similarly, countries like the UK, Australia, and Germany only tax individuals based on their residence, not their nationality. Even though there may be tax-treaties between the countries… it’s vital to ensure the compliance (between both corresponding countries) is what you and the situation intends it to be. Please do this prior to execution.
This difference creates a significant contrast: while a Canadian moving to Portugal may never have to file Canadian taxes again… an American, on the other hand, living in Portugal will still be expected to report their global income to the IRS every year.
The Worst-Case Scenario: An American Living in a High-Tax Country
Now, let’s take this a step further. What happens if an American moves to Sweden, a country known for its high tax rates?
Sweden, like many European nations, has a progressive tax system, with top income tax rates exceeding 50%. If an American moves there, they must first pay Swedish taxes on their income.
Non-residents in Sweden are subject to a flat 25% tax on income earned within the country. This applies to wages from Swedish employers and pension disbursements originating from Swedish sources. This does not include other country-specific taxes… hence, you can see it’s likely that US citizens are forced to pay additional taxes in the United States as well.
But here’s the kicker – because the U.S. taxes its citizens no matter where they live, they still have to file a U.S. tax return and potentially pay more.
While Foreign Tax Credits can help offset some of the burden, the complex tax systems of both countries can lead to situations where expats owe taxes to the IRS and the Swedish government. Additionally, Sweden has their own wealth taxes and social security contributions that may not be fully credited against U.S. tax obligations, leading to an even higher tax burden overall.
Can You Escape the U.S. Tax System?
For Americans who find worldwide taxation too burdensome, there is one drastic solution – renouncing your U.S. citizenship.
However, this is not a decision to be taken lightly. The U.S. charges an exit tax for high-net-worth individuals who renounce their citizenship, meaning that, depending on your assets, you might face a hefty tax bill before leaving the system entirely.
Additionally, giving up your U.S. passport can make re-entering the country more difficult in the future, and it may not be an ideal solution for those who still have business or family ties in the U.S.
So… this is not a decision you make on a “whim” because you’re mad at the system.
The Future of Worldwide Taxation
With increasing globalization and the rise of digital nomads, many have questioned whether the U.S. should shift to a residency-based taxation system like most of the world.
Advocacy groups and expat organizations have pushed for reforms, but for now, U.S. expats must navigate the complexities of worldwide taxation.
If you’re a U.S. citizen living abroad or considering an international move, it’s critical to have a tax strategy in place. Understanding how Foreign Tax Credits, tax treaties, and income exclusions work can mean the difference between paying thousands of extra dollars or legally minimizing your tax burden. As always, if you have a question or want me to review your specific situation, book a free consultation here.
For now, it may just be better to pay Uncle Sam what he’s asking for and hope this situation changes in the future. Otherwise, you may need to take drastic measures to make a change.
Welcome to the New Age of Accounting. Let’s begin.
Chris is the Managing Partner at Weston Tax Associates, a best-selling author, and a renowned tax strategist. With over 20 years of expertise in tax and corporate finance, he simplifies complex tax concepts into actionable strategies that drive business growth. Originally from Sweden, he now lives in Florida with his wife and two sons.
