Many U.S. expats file their tax returns correctly each year and assume that’s the end of the story. In reality, living abroad often creates unusual tax situations that open up planning opportunities most people never notice. The three scenarios below are drawn from TieTax’s years of experience working with U.S. expats and reflect real patterns they see again and again. You may recognize your own situation in one of them.

Repositioning Retirement Assets During a Low-Income Expat Year

A U.S. citizen working in Asia earned a strong salary but used the Foreign Earned Income Exclusion to reduce U.S. taxable income to near zero. While compliance was handled correctly, the return revealed something more important. A large portion of the standard deduction went unused, creating a planning window that would not exist in a typical U.S.-based year.

Rather than letting that value disappear, the taxpayer strategically converted a portion of a traditional IRA to a Roth IRA. The conversion amount was carefully limited to fit within the unused standard deduction and the lowest marginal brackets, resulting in little to no current U.S. tax. This permanently shifted assets from pre-tax to post-tax status.

By repeating partial conversions over several years abroad, the taxpayer substantially reduced future required distributions and long-term tax exposure. Had these conversions been deferred until returning to the U.S., they would likely have occurred at significantly higher rates.

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Harvesting Capital Gains Into Unused Standard Deduction Space

A married couple living in Europe had accumulated a sizable U.S. brokerage account before moving abroad. While overseas, their earned income was largely sheltered through a combination of the Foreign Earned Income Exclusion and foreign tax credits, leaving their U.S. taxable income unusually low each year.

Their annual returns consistently showed a large unused standard deduction. Instead of allowing that deduction to go unused, the couple intentionally realized long-term capital gains each year (in their brokerage account, for example) up to the available standard deductions. This allowed them to sell appreciated ETFs, recognize gains, and reset cost basis with little or no federal tax.

The proceeds were reinvested immediately, preserving market exposure while significantly reducing future capital gains exposure. When the couple later returned to the U.S. and reentered higher income brackets, much of the appreciation had already been taxed at minimal or zero cost.

If you need help to get this started in your situation…
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Strategic Income Recognition in a High-Tax Country

A U.S. family relocated to Northern Europe for a multi-year assignment in a country with relatively high income taxes. Initially, all earned income was excluded using the Foreign Earned Income Exclusion, which eliminated U.S. tax but also left most of the standard deduction unused, thereby limiting long-term planning flexibility.

After reviewing the situation more strategically, the family shifted away from full FEIE usage and relied primarily on foreign tax credits. This increased reported U.S. taxable income while still avoiding double taxation due to the high foreign taxes paid. The approach enabled them to retain full eligibility for Roth IRA and Child Tax Credit benefits while abroad.

This strategy was only viable because the family had no ongoing state income tax exposure. In states such as California or New York, the additional income would have triggered state tax and negated the benefit. The approach also required careful attention to the rules and limitations when coordinating between FEIE and FTC across tax years, as these elections are subject to restrictions and planning constraints when switching between methods.

If you require assistance coordinating between FEIE and FTC…
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Summary

Living abroad creates tax outcomes that are very different from those faced by U.S.-based taxpayers. While filing obligations remain, the interaction between foreign income, exclusions, credits, and deductions often produces low or even zero U.S. taxable income in years where cash flow is strong. When handled correctly, these years can present rare planning windows that allow expats to reduce long-term tax exposure rather than simply comply.

At TieTax, we begin with fundamentals. This includes confirming U.S. tax residency and filing status, determining the appropriate use of the Foreign Earned Income Exclusion and or Foreign Tax Credits, and identifying any ongoing state tax exposure. Without getting these core items right, meaningful planning is either limited or impossible.

Once compliance is solid, TieTax focuses on strategy. Many expats have unused standard deductions, low marginal brackets, or, in some cases, access to the 0 percent long-term capital gains rate. When appropriate, this can allow for capital gains harvesting, cost-basis resets, or partial conversions from traditional retirement accounts to Roth accounts at very low effective tax rates. These opportunities are highly fact-specific and often only exist for a limited number of years.

This type of planning is rarely identified by software alone. Most tax programs optimize only the current year and do not model future outcomes, repatriation risk, or multi-year election consequences. Strategic decisions such as when to recognize income, whether to use FEIE or FTC, and how to coordinate retirement planning require an advisor who understands expat-specific rules and long-term implications.

If you are living abroad and want to understand whether similar planning opportunities exist in your situation, TieTax can help. Our work goes beyond filing and focuses on building a clear framework tailored to your residency profile, income mix, family situation, and future plans. Reaching out early can make the difference between simply complying and meaningfully optimizing while the opportunity still exists!

At TieTax, they specialize in helping U.S. expat teachers navigate their tax obligations. Our experts make sure you file correctly, maximize deductions, and avoid penalties. 📢 Claim your $50 off first-year tax filing—submit your contact info to TieTax, and they will get back to you ASAP!

📩 Have questions? Contact Stephen Boush at TieTax: Stephen.Boush @ tietax.com

Compliance Disclaimer – The scenarios above are illustrative examples only and are not intended as tax advice. Tax outcomes vary significantly based on individual facts, residency status, state tax exposure, foreign tax systems, and multi-year elections. Strategies involving the Foreign Earned Income Exclusion, Foreign Tax Credits, capital gains recognition, and retirement account conversions require careful analysis and may not be appropriate for all taxpayers.