Partner article: What Americans need to know about filing US tax returns in France

Most Americans will know they have to file US tax returns and pay US tax no matter where they live where their income is above the standard deduction (currently $13,850 for a single taxpayer and $27,700 for married filing joint). The February/March issue of Connexion reported there is a bill pending before the United States congress to change this and allow American citizens to elect to be treated as non-resident and thus only be taxable on US income. See the article here.

While we should hope the status quo will be changed with the success of the bill, proposals such as the current one have been made over many congresses without passage. Unfortunately, the push by the current administration to extend tax breaks and create new ones calls into question whether the bill in its current form has any chance of passage.

So, what should Americans living in France be thinking about when it comes to living, working, investing and doing business in France. Here, let’s start with some of the basics.

As well as US federal tax, some states like California will also seek to treat a person as continuing to be domiciled there if they maintain too many ties to the state (eg,renew a driver license, maintain a bank account, keep a home empty, etc.).

Note that a report of foreign bank accounts is also required for each year where a US person has a combined maximum balance on all non-US accounts exceeding $10,000. This is done online here. 

The penalty for non-filing can be quite severe (up to $10,000 per year for each non-filing) but these may be waived with reasonable cause or avoided where late FBARs are filed under a streamline procedure.

Because France has a high tax on income and gains relative to the US, the US tax obligation generally should not produce many issues. This is because the US allows a credit for non-US taxes paid (or accrued) to offset the US tax arising on income and gain. Additionally, the US allows an exemption of the first $130,000 of earned income for expatriates. So why does the US tax obligation matter?

First, you need to stay compliant. A return needs to be filed each year even if you do not think you have a US liability because you pay French tax. There is a minimum that can be realised annually of $13,850 per person for 2025 with no US liability. If you haven’t filed for years but have paid French tax, don’t lose sleep, the US has a procedure that allows US taxpayers behind in filing to “true up” their filings and become current. This procedure requires a filing of three delinquent years’ returns (2024 is not due until 15 June 2025 for non-US resident taxpayers) and 6 years of the bank account reports.

Next, let’s go through some of the basic differences where Americans can get “caught out” from a tax perspective living outside the US.

1. Foreign exchange – All US persons must report income, gains, expenses, etc. in US dollars. So, if an asset is purchased and sold in €, there may be no gain or loss but when converting purchase and sale to USD there may be a gain that will attract US tax. With a strong dollar in the current market relative to recent times, this may not be a major issue. However, the foreign exchange issue also arises on settling liabilities including mortgages. In this case, where the US dollar has strengthened so that it takes less dollars to settle the debt, because less dollars are needed results in a foreign exchange gain that is treated as “other foreign income” for US tax purposes and taxed at regular (as opposed to capital gain) rates. Here the US tax may be offset with so called excess foreign tax credits paid to France in prior years but the complexities here on the foreign tax credit mechanism are beyond the scope of this article.

2. Selling a residence – Where a US person sells a main home, the gain realised is normally not French taxable. For US purposes, where the home was lived in for at least 2 of the 5 years leading up to the year of sale, the first $250,000 ($500,000 for married filing joint) of gain is exempt. The remainder is taxed at capital gain rates to 20%. Again, tax credits may be available to offset the US tax 

3. Investment Income – The US has a separate tax on investment income, the 3.8% Net Investment Income Tax (NIIT) is imposed on net investment income where adjusted gross income exceeds $200,000 ($250,000 married filing joint). The NIIT may not be offset with credits for non-US tax paid. This will also apply to the US tax on sale of a residence noted above.

4. Passive Investment Income – The US has many US tax rules designed to dissuade Americans from seeking to defer investment income by investing outside the US. One such rule is the Passive Foreign Investment Company (PFIC) regime that is particularly onerous. Under the PFIC rules, where income or gains are retained in a foreign investment vehicle for a number of years, distributions of gain on disposal are treated as having been paid over the US investor’s holding period, taxed each year at the highest US marginal rate (37% since 2018) regardless of the US person’s actual rate on other income, and an interest charge is imposed on the tax on the income allocated to each year. The PFIC regime is quite draconian as it can apply not only to investment fund vehicles like open end investment companies commonly used throughout Europe, but also to other types of non-investment companies like service entities that maintain high cash balances and property development entities.

While we wait in hope that the proposal to leave expatriate Americans out of the US tax net makes it into law, until then, Americans need to continue to deal with an antiquated system. 

This article was written by Ed Rieu, a US tax lawyer based in France ed@ustaxconsultingeurope.com