Moving country mid-year: what changes on your US return, and what does not

Moving from one country to another is disruptive enough before the tax consequences. The specific difficulty for an American is that the US return does not acknowledge the move at all: it still asks for one calendar year of worldwide income, on one form, in one currency — while everything underneath it changed halfway through.

What does not change

• The filing obligation, which follows citizenship rather than residence.
• The calendar year, which does not restart or split.
• Worldwide income, which includes income from both countries and from anywhere else.
• The FBAR aggregate, measured across every non-US account you held at any point in the year — including ones you closed on leaving.
• Form 8938, tested on its own thresholds against the assets you held during the year.

What the move actually breaks

The Foreign Earned Income Exclusion

This is the relief most damaged by a move, and the damage is structural rather than arithmetic. The bona fide residence test requires an uninterrupted period of residence including a full tax year; leaving mid-year can mean the test is not met for that year at all. The physical presence test counts 330 full days in any 12 consecutive months, which survives a move between two foreign countries — days abroad are days abroad — but not a move back to the US, and the exclusion is prorated to the qualifying days within the tax year.

The Foreign Tax Credit

The credit copes with a move better, because it is computed by income category and source rather than by country of residence. Tax paid to both countries feeds the same Form 1116 categories. What creates the work is timing: the credit relates foreign tax to the US year of the income, and foreign tax years rarely line up with the calendar.

There is a further decision hiding here: whether you claim the credit on a paid or an accrued basis. The accrual election matters most in exactly this situation, and it is one that continues to bind in later years — so it is worth deciding deliberately rather than by default.

Splitting the FEIE and the credit in one year

In a year with a move, many filers want the exclusion for part of the income and the credit for the rest. That combination is possible, but the two do not simply sit side by side: income excluded under the FEIE cannot also generate a creditable foreign tax, and the credit's limitation is computed after the exclusion has removed income from the calculation. Getting the interaction wrong in a move year is one of the more common ways an expat return ends up wrong in the taxpayer's own favour — which is the direction that later costs the most.

The investment side of a move

Moves are funded by selling things, and selling things is where the expensive events are. A brokerage account closed on leaving a country is a series of dispositions; where the holdings are non-US pooled funds, each is a PFIC disposition and the default §1291 regime allocates the gain back across the entire holding period with an interest charge. A move year is therefore frequently the year with the largest PFIC consequence, and the reader often does not connect the two.

The currency matters too. Basis is taken in dollars at the acquisition-date rate and proceeds in dollars at the disposition-date rate, so a holding that broke even in euros can produce a dollar gain or loss purely from the exchange rate.

Working through a move year

1. Fix the dates: the day you ceased residence in the first country and began it in the second, with evidence.
2. Test the FEIE for the calendar year — bona fide residence first, then physical presence over any 12-month window that maximises qualifying days.
3. Split your income by source and category, then by the country whose tax applies to it.
4. Map each foreign tax payment to the US year of the income it relates to, not to the year it was paid.
5. List every account opened or closed during the year and take each one's maximum balance for the FBAR aggregate.
6. List every sale made to fund the move, and flag the pooled funds among them before assuming the gains are ordinary capital gains.