Foreign Investment Tax for US expats: Rules, forms, and reporting
- US taxpayers generally pay US tax on foreign investment income for the 2025 tax year, even when the account is outside the United States.
- A foreign country may also withhold or assess tax on dividends, interest, or gains.
- The foreign tax credit can reduce double taxation when the foreign tax qualifies.
- Extra reporting may apply through Form 1116, Form 8938, FBAR, or Form 8621.
Foreign investing can mean buying shares on a foreign exchange, holding a non-US mutual fund, earning interest in a foreign bank account, or owning a foreign brokerage account. The tax for foreign investment is not a separate flat IRS tax. It is usually regular US income tax applied to dividends, interest, capital gains, and other investment income.
For 2025 returns filed in 2026, US taxpayers should start with 2 core IRS rules:
- foreign-source investment income is generally reportable, and
- long-term capital gains may be taxed at 0%, 15%, or 20%, depending on taxable income.
You can review the IRS guide to capital gains and losses and the IRS Publication 550 investment income guide for baseline rules.
The bigger risk for expats is often not the income tax itself. It is missing a reporting form because a foreign account, fund, or asset did not issue a US-style Form 1099. Taxes for Expats helps Americans abroad organize these filings, reduce double-tax exposure where the law allows, and avoid last-minute form surprises.
How foreign investments are taxed in the US
US taxpayers are generally taxed on worldwide income for the 2025 tax year, so a foreign location alone does not make investment income tax-free. US tax on foreign investment income depends on the type of income, the holding period, and whether foreign tax was paid or withheld.
Foreign investment taxes can include 3 layers: foreign tax in the investment country, US income tax on the same income, and separate US reporting obligations. For expats who are new to annual filing, our guide to US expat tax rules explains why living abroad does not end US filing duties.
How are foreign investments taxed? The United States generally taxes the return from the investment, not the country where the account sits. Dividends, interest, and capital gains each follow their own reporting path.
Based on our client scenario at TFX: A US citizen living in Portugal receives €3,000 of dividends from a French company, and France withholds tax before the money reaches the brokerage account. The taxpayer still reports the dividends on the 2025 US return, converts the amounts to US dollars, and reviews whether Form 1116 can reduce double taxation.
Tax on foreign dividends
Foreign dividends are generally taxable on a 2025 Form 1040, even if the payer is outside the United States or no Form 1099-DIV arrives. Qualified dividends may receive the 0%, 15%, or 20% long-term capital gain rate, but only if the foreign corporation and holding-period rules are met.
Foreign dividends are ordinary dividends unless they meet the qualified-dividend rules, including eligible foreign corporation status, holding-period requirements, and the rule excluding certain dividend types. The IRS generally requires qualified dividends to be paid by a US corporation or a qualified foreign corporation, and the shareholder usually must hold common stock for more than 60 days during the 121-day period around the ex-dividend date.
Foreign dividend taxation can also change when the payer is a foreign mutual fund or other PFIC. For a deeper dividend-only explanation, see our guide to taxation of foreign dividends.
Tax on foreign interest income
Foreign interest income is generally reported as taxable interest on Form 1040, with Schedule B required in common cases, including when taxable interest or ordinary dividends exceed $1,500 or when the taxpayer has certain foreign financial account reporting answers. Schedule B is generally required if taxable interest or ordinary dividends exceed $1,500, and it may also be required when you had a financial interest in, or signature authority over, a foreign financial account or certain foreign trust activity.
Foreign banks may not issue Form 1099-INT, but the income still belongs on the US return when it is received or credited to your account. The income tax on foreign investments does not disappear because the payer is a non-US bank.
Interest from a foreign account can also create a separate FBAR issue if all foreign financial accounts exceed $10,000 in aggregate at any time during the calendar year. That threshold applies even if the account earns only $20 of interest.
Tax on foreign capital gains
Foreign capital gains are generally reportable on the 2025 US return when a US taxpayer sells foreign stock, foreign fund shares, foreign bonds, or other investment property for more than the basis. Short-term gains are generally taxed at ordinary income rates, while most net long-term capital gains are taxed at 0%, 15%, or 20%, depending on taxable income.
For 2025, the 20% long-term capital gain rate starts only after taxable income exceeds the 15% threshold for the taxpayer’s filing status – $533,400 for single filers and $600,050 for married filing jointly.
| 2025 filing status | 0% long-term capital gain rate applies up to | 15% long-term capital gain rate applies up to | 20% rate starts above |
|---|---|---|---|
| Single or married filing separately | $48,350 | $533,400 single, $300,000 MFS | $533,400 single, $300,000 MFS |
| Married filing jointly or qualifying surviving spouse | $96,700 | $600,050 | $600,050 |
| Head of household | $64,750 | $566,700 | $566,700 |
There is no single foreign investment tax rate for all expats. A foreign stock held for 14 months may receive long-term capital gain treatment, while a similar stock sold after 6 months is generally short-term and taxed at ordinary rates.
Some taxpayers may also owe the 3.8% Net Investment Income Tax when modified adjusted gross income exceeds $200,000 for single or head of household filers, $250,000 for married filing jointly, or $125,000 for married filing separately. This extra tax can apply to interest, dividends, capital gains, rental income, and other net investment income.
Foreign investment tax credit: how to reduce double taxation
The foreign investment tax credit can reduce US tax when a foreign country taxes the same foreign-source investment income. For 2025, the credit is generally claimed on Form 1116 unless the taxpayer qualifies for the small passive-income exception, such as the $300 or $600 limit.
The credit is usually more valuable than a deduction because it reduces US tax dollar-for-dollar, while a deduction only reduces taxable income. IRS Publication 514 explains the credit-versus-deduction choice, and the IRS foreign tax credit page gives the main eligibility framework for individuals.
The 2025 decision rule is simple: a credit usually beats a deduction when the same $1 of foreign tax qualifies, but Form 1116 limits may stop you from using all of it in the current year.
| Choice | What it reduces | Where it is generally claimed | Practical result |
|---|---|---|---|
| Foreign tax credit | US income tax liability | Form 1116 or Schedule 3 if the exception applies | Usually better for qualifying foreign income taxes |
| Itemized deduction | US taxable income | Schedule A | Useful only if itemizing and the deduction gives a better result |
Most expats worried about foreign tax credit investment income are dealing with passive category income, such as dividends, interest, or certain gains. The form rules can become more complex if the investment sits inside a partnership, S corporation, foreign corporation, or foreign fund.
When Form 1116 is required for foreign investment income
Form 1116 is usually required when you claim a foreign tax credit for 2025 foreign investment income and do not qualify for the small passive-income exception. The form limits the credit to the US tax attributable to foreign-source taxable income in each separate income category.
This matters because the foreign tax credit is nonrefundable. It can reduce US income tax, but it cannot create a refund beyond the US tax otherwise owed on the return.
For a step-by-step form explanation, see our guide to foreign tax credit for expats.
When you may not need Form 1116
You may be able to skip Form 1116 for 2025 if all foreign-source gross income is passive category income, all income and foreign taxes are reported on qualified payee statements, total creditable foreign taxes are no more than $300, or $600 if married filing jointly, and you elect the simplified procedure. The election is not available to estates or trusts, and if you use it, you cannot carry foreign taxes from that election year to or from another year.
The following 5 conditions are the practical screen before relying on the Form 1116 exception:
- All foreign-source gross income for the year is passive category income, such as interest or dividends.
- The income and foreign taxes are reported on qualified payee statements.
- Total creditable foreign taxes are no more than $300, or $600 on a joint return.
- The stock or bond holding-period and payee-statement rules are satisfied.
- You do not need to carry foreign taxes back or forward to another year.
Skipping Form 1116 also means giving up any carryback or carryforward for unused foreign taxes from that year. That tradeoff can matter if the foreign tax rate is higher than the US tax generated by the same income.
How the foreign tax credit limit works
The Form 1116 limit for 2025 is based on US tax liability and foreign-source taxable income, not simply on the amount of foreign tax paid. The IRS compares foreign-source taxable income with total taxable income, then limits the credit to the US tax tied to that foreign-source income category.
Based on our client scenario at TFX: A US expat has $10,000 of foreign dividends and pays $2,000 of foreign tax abroad. If Form 1116 calculates only $1,400 of US tax attributable to that passive foreign income, the 2025 credit is generally limited to $1,400, and the unused $600 may be reviewed for carryback or carryforward treatment.
The credit limit is calculated separately by category. Passive investment income is generally not blended with wages or self-employment income when Form 1116 separates income into categories.
Which foreign taxes qualify for the foreign tax credit
A foreign tax generally qualifies for the FTC only if it is a creditable foreign income tax, or a tax imposed in lieu of an income tax, that you paid or accrued on income subject to US tax. For 2025 investment income, withholding on foreign dividends or interest is often the starting point, but eligibility still depends on the facts.
The IRS does not treat every foreign charge as creditable. Foreign property taxes, sales taxes, wealth taxes, penalties, and interest charges generally do not qualify as foreign income taxes for Form 1116.
The following 4 conditions should be checked before treating a foreign tax as creditable:
- Legal and actual liability: You must be legally responsible for the tax, and the amount cannot be reasonably refundable or reduced if you claim treaty relief.
- Imposed on you: The tax must be imposed on your income, or properly passed through to you through a partnership, S corporation, trust, estate, or regulated investment company.
- Paid or accrued: You generally claim the tax in the year paid or accrued, depending on your method and any election made on Form 1116.
- Income tax or tax in lieu of income tax: The tax must be an income, war profits, or excess profits tax, or a qualifying tax imposed instead of an income tax.
Do not mix investment-income FTC rules with the foreign earned income exclusion. If wages are excluded on Form 2555, the foreign taxes allocable to that excluded wage income generally cannot also be used for the credit; our comparison of the foreign tax credit vs. the foreign earned income exclusion explains that separation.
Foreign investment tax reporting: which forms may apply
Foreign investment tax reporting can involve 4 different forms for the same 2025 investment account: Form 1116 for the credit, Form 8938 for specified foreign financial assets, FBAR for foreign financial accounts, and Form 8621 for PFICs. Other forms may also apply, including Form 5471 for certain foreign corporation ownership or officer/director situations. These forms do different jobs and are not substitutes for one another.
Reporting foreign investments US tax rule: income reporting and asset reporting are separate. A foreign brokerage account may have no taxable income for 2025 and still require FBAR or Form 8938 reporting if the thresholds are met.
Form 1116 for the foreign tax credit
Form 1116 is the main 2025 foreign investment tax form for calculating the allowable credit when foreign income taxes were paid or accrued. Most foreign dividends, interest, and portfolio income fall into the passive category, but the category must be confirmed before filing.
Use Form 1116 when the small passive-income exception does not apply or when unused foreign taxes may need to be carried back 1 year or forward up to 10 years. The form is attached to Form 1040, 1040-SR, or 1040-NR.
Form 8938 for specified foreign financial assets
Form 8938 is attached to your federal tax return when specified foreign financial assets exceed the applicable threshold. For taxpayers living abroad, the threshold is generally more than $200,000 at year-end or $300,000 at any time for unmarried or married-filing-separately taxpayers, and more than $400,000 at year-end or $600,000 at any time for married taxpayers filing jointly.
Specified foreign financial assets can include foreign financial accounts, foreign stock or securities held outside a financial account, foreign partnership interests, foreign pension interests, certain foreign annuities, and other investment contracts with non-US issuers. Our Form 8938 guide for expats explains the thresholds and asset categories in more detail.
For 2025, Form 8938 and FBAR have different filing systems, different thresholds, and different asset definitions – one does not replace the other.
| Form | Filed with | Key 2025 trigger for many expats | What it reports |
|---|---|---|---|
| Form 8938 | IRS, attached to the tax return | More than $200,000 year-end or $300,000 anytime for many unmarried taxpayers living abroad | Specified foreign financial assets |
| FBAR | FinCEN, not attached to Form 1040 | More than $10,000 aggregate foreign financial accounts at any time in the year | Foreign financial accounts |
FBAR reporting for foreign financial accounts
FBAR reporting applies when a US person has a financial interest in, signature authority over, or other authority over foreign financial accounts whose aggregate value exceeds $10,000 at any time during the calendar year. The FBAR is FinCEN Form 114, and it is filed electronically with FinCEN, not with the IRS tax return.
The FBAR due date is April 15 following the calendar year reported, with an automatic extension to October 15. No separate extension request is required.
Foreign financial accounts can include bank accounts, brokerage accounts, and foreign mutual fund accounts maintained by a financial institution outside the United States. Our detailed FBAR filing guide covers maximum value reporting, joint accounts, and late filing options.
Form 8621 and PFIC rules for foreign mutual funds
Form 8621 may be required when a US person directly or indirectly owns a passive foreign investment company, often called a PFIC. Foreign mutual funds, non-US ETFs, and certain foreign pooled funds commonly create PFIC concerns, even when the investment balance is modest.
A foreign corporation is generally tested as a PFIC under a 75% passive-income test or a 50% passive-asset test. Form 8621 may be required for distributions, gains, QEF elections, mark-to-market elections, or annual reporting under section 1298(f).
PFIC tax rules can be harsher than regular capital gain rules because excess distributions may be allocated across the holding period and charged interest.
Common foreign investment tax mistakes to avoid
Most foreign investment tax mistakes come from treating a non-US account like a US brokerage account that reports everything neatly on Form 1099. For 2025 returns filed in 2026, the most common problems involve missing forms, misreading thresholds, and assuming foreign withholding solves US tax.
The following 5 mistakes are the ones US expats should check before filing:
- Assuming foreign tax means no US tax. Paying tax abroad does not automatically eliminate US reporting or US tax. The consequence is that dividends, interest, or gains may be omitted from Form 1040 even though a foreign tax credit could have reduced the US tax properly.
- Missing Form 8621 for foreign mutual funds. Non-US mutual funds and ETFs can be PFICs, and Form 8621 may be required even when the account balance is not large. The consequence is that the return may be incomplete, and PFIC tax calculations may become harder to fix later.
- Confusing FBAR with Form 8938. FBAR is filed with FinCEN when aggregate foreign financial accounts exceed $10,000, while Form 8938 is attached to the tax return when specified foreign financial assets exceed higher FATCA thresholds. The consequence is that filing one form may still leave the other missing.
- Assuming only bank accounts are reportable. Foreign brokerage accounts, foreign mutual fund accounts, and certain pension or investment accounts can be reportable, depending on the form. The consequence is that a taxpayer may report interest income but miss asset disclosure.
- Forgetting Form 1116 limitations and carryovers. The FTC does not automatically equal the foreign tax paid, and unused foreign tax may need carryback or carryforward tracking. The consequence is overclaiming the current-year credit or losing track of credits that could matter within the 10-year carryforward window.
Review the account type, maximum value, income, foreign tax withheld, and fund classification before filing. That 5-part review usually points to the right forms: Form 1116, Form 8938, FBAR, Form 8621, or a combination.
Do you have to pay taxes on foreign investments if tax was already withheld abroad?
Foreign withholding tax does not automatically eliminate US tax for 2025, but it may reduce double taxation if the tax qualifies for the foreign tax credit. The key question is whether the same income is taxable in the US and whether the foreign tax is creditable on Form 1116 or under the small-tax exception.
- What foreign withholding means: Foreign withholding is tax taken out before dividends, interest, or sale proceeds reach your account. A broker might withhold 15% on foreign dividends under a treaty rate, or a country may impose domestic withholding under its own rules.
- Why the income may still be taxable in the US: US taxes on foreign investments are based on worldwide income rules for US citizens and resident aliens. This means the gross dividend, interest, or gain may still need to be reported on the US return even if a foreign broker has already withheld tax.
- When the foreign tax credit may help: The credit may reduce US tax when the foreign tax is a qualifying income tax or tax in lieu of income tax, and the income is foreign-source income for FTC purposes. The tax on foreign investment income can therefore be reduced, but not always eliminated.
Based on our client scenario at TFX: A US citizen in Spain receives $4,000 of foreign dividends, and $600 is withheld abroad. The $4,000 is still reported on the 2025 US return; if the $600 qualifies, Form 1116 may reduce US tax on that passive foreign-source income, subject to the Form 1116 limit.
For more complex holdings, treaty provisions and sourcing rules matter. This is especially true for capital gains, foreign funds, and investments held through foreign entities.
Foreign Investment Tax FAQ
These 6 FAQs answer the form and tax questions that matter most for US expats filing 2025 returns in 2026.
Yes, US citizens and resident aliens generally report worldwide income, including foreign dividends, foreign interest, and gains from foreign investments. Foreign tax paid abroad may reduce US tax through the FTC, but it does not automatically remove the income from Form 1040.
The form depends on the fact pattern. Form 1116 is for the foreign tax credit, Form 8938 is for specified foreign financial assets, FBAR is for foreign financial accounts over $10,000 in aggregate, and Form 8621 is for PFIC holdings.
No. Form 8938 is attached to the IRS tax return and uses FATCA thresholds that can be as high as $200,000 or $400,000 at year-end for certain taxpayers living abroad, while FBAR is filed with FinCEN and uses a $10,000 aggregate account threshold.
They often do. Many non-US mutual funds and ETFs are PFICs, and Form 8621 may be required for distributions, gains, elections, or annual section 1298(f) reporting.
You may be able to claim the credit if you paid or accrued qualifying foreign income tax on foreign-source income that is also subject to US tax. The credit is generally nonrefundable and may be limited by Form 1116.
The fix depends on which form was missed and whether income was omitted. A missing FBAR, Form 8938, Form 8621, or Form 1116 should be reviewed quickly because penalties, amended returns, or delinquent filing procedures may apply.
