For US citizens living abroad, paying tax in your country of residence does not necessarily mean you are finished paying tax. And the latest US court cases do not help!
Two recent US court decisions have delivered a stark reminder of that reality.
On August 31, 2026, the US Court of Appeals for the Federal Circuit ruled in Estate of Bruyea v. United States and Christensen v. United States that foreign tax credits available under the Canada-US and France-US income tax treaties could not be used to offset the 3.8% US Net Investment Income Tax (NIIT). The court reversed earlier taxpayer-friendly decisions in both cases.
What is NIIT?
The Net Investment Income Tax (NIIT) is an additional 3.8% US tax on certain investment income for higher-income taxpayers. Introduced in 2013 to help fund health care policy changes, it can apply to income such as capital gains, dividends, interest, rental income and certain passive business income once a taxpayer’s modified adjusted gross income exceeds the applicable threshold.
For US expats, living and paying tax outside the United States does not necessarily protect them from NIIT. As the recent court decisions demonstrate, even where foreign tax has already been paid on investment income, a foreign tax credit may not be available to offset NIIT.
For US citizens and Green Card holders living abroad, the decisions involving NIIT highlight a fundamental problem with the US tax system: the United States generally taxes its citizens and residents on their worldwide income regardless of where they live.
When foreign tax credits aren’t enough
Foreign tax credits are an important mechanism for reducing double taxation. But they do not provide universal protection.
In Bruyea, a US citizen living in Canada sold Canadian real estate and paid Canadian income tax on the gain. The IRS also imposed NIIT on that income. The taxpayer argued that the Canada-US tax treaty allowed him to use his Canadian taxes as a credit against the NIIT.
The Federal Circuit disagreed. It concluded that the Internal Revenue Code and Canada-US treaty did not permit the foreign tax credit to offset NIIT. The court reached the same conclusion in Christensen, involving US citizens living in France.
The result? Income can be taxed in the country where a US citizen lives and still attract an additional US tax that foreign tax credits cannot eliminate. Not good for Mr. and Mrs. Tax-Paying US Citizens living abroad!
A warning for US business owners abroad
While these cases concern NIIT rather than the Global Intangible Low-Taxed Income (GILTI) regime, the broader lesson is particularly relevant to US citizens and Green Card holders who own businesses outside the United States.
Owning shares in a non-US corporation can bring an entirely different layer of US tax rules into play, including the controlled foreign corporation and GILTI regimes. Someone operating an ordinary Canadian, British, Australian or other non-US business may therefore discover that a company established and operated entirely outside the United States still creates complicated US tax and reporting consequences.
Moving abroad does not end those obligations. Establishing a foreign company does not end them. And paying tax in another country does not guarantee that every US tax liability disappears through foreign tax credits.
That can make US citizenship an increasingly expensive proposition for entrepreneurs who have built their lives and businesses elsewhere. Properly renouncing your US citizenship is almost the only viable option left!
When is enough, enough?
For many US citizens abroad, the frustration is not simply the amount of tax. It is the continuing uncertainty, annual compliance burden and possibility that changes in US tax law, or a new interpretation by the courts, can alter their US tax exposure.
For individuals who intend to remain outside the United States permanently, that inevitably raises a bigger question: Do I want to remain connected to the US tax system for the rest of my life?
Our firm fully understands the importance of renouncing our client’s US citizenship properly.
The important word in that phrase is “properly.” If US citizenship or a Green Card is not terminated correctly, one can be subject to tens of thousands of dollars in failure-to-file penalties, as well as an exit tax and covered expatriate status. The US has many pitfalls and landmines (exit tax, inheritance tax, lifetime disbarment from the US, loss of benefits, etc.) that one must successfully navigate. Our firm can work with you to ensure that these pitfalls are avoided.
Each year, our team of lawyers help 1200–1400 US citizens successfully terminate their US status – more than any other firm in the world. We’ve helped thousands of US expats and Green Card holders successfully terminate their citizenship status – but, again, it MUST be done the right way.
If you or a family member is a US citizen or Green Card holder considering renunciation, visit our dedicated webpage for more information. This page contains links to register for our upcoming renunciation webinars. You can find one tailored to your geographic location in our events listings.
These webinars thoroughly review everything you need to know about the US citizenship renunciation process and the options available if you decide to take the next steps.
Moodys Tax Law is only about tax. It is not an add-on service, it is our singular focus. Our Canadian and US lawyers and Chartered Accountants work together to develop effective tax strategies that get results, for individuals and corporate clients with interests in Canada, the US or both. Our strengths lie in Canadian and US cross-border tax advisory services, estateplanning, and tax litigation/dispute resolution. We identify areas of risk and opportunity, and create plans that yield the right balance of protection, optimization and compliance for each of our clients’ special circumstances.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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