Returning to the US: Repatriation Tax Planning for Expats (2026)

Most US expats spend months planning the move abroad. The move back often gets two weeks of googling and a frantic call to a CPA who has never dealt with PFIC cleanup or Canadian RRSP elections. The result is preventable tax bills. This guide covers every major decision that must happen before you land — and a few that still matter after.

The Repatriation Tax Planning Timeline

1. PFIC Cleanup: Most Urgent

If you hold foreign mutual funds, foreign ETFs, or investment accounts with non-US fund managers, these positions are almost certainly Passive Foreign Investment Companies (PFICs) under IRC §1291–§1298. While you are a non-US resident, the unrealized gains sit dormant. The moment you reestablish US residency, you are fully subject to the PFIC regime — and the §1291 excess-distribution calculation is brutal.

Under §1291, when you eventually sell or receive a distribution from a PFIC you did not elect out of:

• The gain is treated as an "excess distribution" and allocated pro-rata across your entire holding period
• The portion allocated to each prior year is taxed at the highest ordinary rate for that year (currently 37%) — regardless of actual income in those years
• Interest is charged on each prior-year allocation at the IRS underpayment rate (6% for Q2 2026 — set quarterly by the IRS)³
• The combined effect makes a 10-year holding period in a PFIC substantially more expensive than the nominal gain suggests

What to do before you return

• Sell the PFIC positions while you are still a non-US resident. As a non-resident alien, you generally owe no US tax on gains from the sale of foreign securities (unless the PFIC has a US-situs asset). Recognize the gain under local country tax rules, convert to US-domiciled ETFs (Vanguard, iShares, Fidelity — US-listed, US-domiciled), and return with a clean portfolio.
• If you can't or won't sell: make a mark-to-market (MTM) election on Form 8621 for the first year of your US residency. MTM avoids the §1291 interest charge on future accruals by marking gains/losses to market each year. You still pay ordinary income tax annually on unrealized gains, but you escape the punitive prior-year interest calculation.
• Do not return holding Irish UCITS ETFs, UK OEICs, or local market mutual funds without a plan. The PFIC trap on these is well-documented and expensive. See the full PFIC rules guide for the math on specific holding scenarios.

2. Foreign Pension Decisions

Not all foreign retirement accounts are equally problematic. Some have treaty protections that make them worth keeping; others are PFIC traps that should be liquidated before you return. Here is the country-by-country picture:

3. Final-Year FEIE: Prorate It Carefully

In the year you return to the US, you may still qualify for the Foreign Earned Income Exclusion for the portion of the year spent abroad. The 2026 FEIE maximum is $132,900.¹

Two tests to establish the prorated exclusion:

• Physical presence test: if you spent 330+ qualifying days outside the US in any 12-month period overlapping with the calendar year of your return, you can prorate the FEIE by qualifying days.
• Bona fide residence test: if you established bona fide foreign residence for a full prior calendar year, you may qualify for the partial return year. Bona fide residents who return mid-year can exclude income earned through the date foreign residence ended.

Prorated FEIE formula: (qualifying days abroad in the calendar year ÷ 365) × $132,900 = maximum exclusion for the return year.

Example: you return to the US on July 15, 2026. You spent 195 days abroad in 2026 (January 1 through July 14). Your prorated FEIE ceiling is 195 ÷ 365 × $132,900 = approximately $71,000. Foreign wages earned through July 14 up to that limit are excludable.

4. Roth Conversion Window: Act Before You Return

For expats who use the Foreign Earned Income Exclusion, the final 1–2 years abroad are the lowest-cost window for Roth conversions in your lifetime. Here's why:

FEIE excludes up to $132,900 of foreign-source earned income. The 2026 standard deduction removes another $16,100 (single) or $32,200 (MFJ). The combined effect: your US taxable income before a Roth conversion can be near zero, leaving the entire 10% and 12% federal brackets open for conversions at low effective rates.

A $50,000 Roth conversion in that context costs roughly $3,800–$5,800 in federal income tax — an effective rate of 7–12%. The same conversion in your first full year back in the US, earning $200,000+, could cost $44,000–$50,000 at the 32–37% bracket.

2026 Roth IRA direct contribution limits are $7,500 (under 50) / $8,600 (age 50+).² However, many expats using FEIE are ineligible to contribute directly (MAGI including excluded income exceeds the $168,000 single / $252,000 MFJ phaseout). Conversions are the only Roth door available to them — and they are unlimited in amount.

Important: California and New York do not recognize FEIE. If you maintain domicile in either state, the converted amount is also subject to state income tax at up to 13.3% (CA) or 10.9% (NY). State domicile planning — covered in the next section — is inseparable from Roth conversion planning.

5. State Domicile: Where You Land Matters for Years

Where you establish domicile when you return determines your state income tax exposure — not just for the return year but for every year going forward until you leave that state.

Practical approach: if you have any flexibility — family, remote work, no specific city anchor — spend your first months establishing domicile in Texas or Florida. Obtain a driver's license, register to vote, open bank accounts, and file any available homestead exemption. That domicile, established before your first full US income year, is worth the effort.

If you must return to California or New York, move there after your last low-income tax year (not before). The date domicile attaches is the date you intend to make that location your permanent home. If you are interviewing for a job in San Francisco, you have not established California domicile until you accept and intend to stay.

6. FBAR and Form 8938 in the Return Year

Foreign account reporting requirements do not stop mid-year when you return to the US. FBAR (FinCEN 114) is required for any calendar year in which your foreign financial accounts exceeded $10,000 at any point during that year — regardless of when during the year you returned.

Form 8938 (Statement of Specified Foreign Financial Assets) has a separate but overlapping scope. For US residents, the reporting threshold is $50,000 at year-end or $75,000 at any point during the year (single) — double for MFJ. Note that Form 8938 includes PFIC holdings and certain foreign pensions that FBAR does not.

Deadlines in your return year: FBAR is April 15 with automatic extension to October 15. Form 8938 is attached to your tax return (April 15, or October 15 with extension).

7. Catch Up on Unfiled Returns Before You Return

If you have years of unfiled US tax returns from your time abroad, you have two compliance paths — and the better one closes the moment you land:

IRS Streamlined Foreign Offshore Procedures (SFOP) — 0% penalty. Available to US persons who have not been "US resident" (as defined for streamlined purposes) in any of the three most recent tax years for which a return was due, and whose non-compliance was non-willful. You file 3 years of amended/delinquent returns and 6 years of FBARs, pay the tax and interest owed, and the miscellaneous penalty is zero. This is the path most returning expats should take — but it requires you to act while you are still a non-resident.⁴

IRS Streamlined Domestic Offshore Procedures (SDOP) — 5% penalty. Once you are a US resident, SFOP is closed and you can only use SDOP. The mechanics are similar (3 years of returns, 6 years of FBARs) but the IRS charges a 5% miscellaneous offshore penalty on the highest aggregate unreported balance across the filing period. For a person with $300,000 in unreported foreign accounts, that is $15,000 in penalty — avoidable by filing SFOP before returning.

If your non-compliance was willful — you knew you owed filings and deliberately did not file — neither streamlined path is available. The Voluntary Disclosure Practice (VDP) is the appropriate path, but it carries higher cost and scrutiny. Consult a tax attorney before making any filings if willful conduct is a possibility.

8. Currency Repatriation (§988)

When you repatriate foreign-currency assets — sell a foreign bank account, close a GBP savings account, receive the proceeds from selling a foreign-currency bond — the exchange rate gain or loss on the foreign-currency component is treated as ordinary income under IRC §988, not as capital gain.

Example: You opened a GBP savings account in 2019 when GBP/USD was 1.28. You close it in 2026 when GBP/USD is 1.35. The £100,000 account produces a §988 gain of (1.35 − 1.28) × 100,000 = $7,000 of ordinary income — separate from any interest the account earned.

Personal-use exception: The §988 currency gain on your principal residence mortgage is excluded (under TRA 1986 and general personal-use principles). If you sell a foreign home with a foreign-currency mortgage and the mortgage payoff produces a currency gain, that specific component is generally exempt. The underlying home-sale gain (or §121 exclusion) is a separate calculation.

Strategy: Before returning, consider converting large foreign-currency savings balances to USD while still in the foreign country. This locks in your FX rate for US purposes and simplifies the return-year reporting. Document the conversion rate at the time of transfer — you will need this to calculate basis for US purposes.

9. Healthcare Transition

Losing foreign healthcare coverage when you return is a qualifying life event under the ACA. You have 60 days from the date you lose foreign coverage to enroll in an ACA marketplace plan without waiting for Open Enrollment. If you miss this window, you must wait until the next Open Enrollment (November 1 – January 15) for coverage starting January 1.

International health insurance (Cigna Global, Aetna International, BUPA Global) does not count as Minimum Essential Coverage for US purposes. You will need ACA-qualifying coverage once you establish US residency — or pay the employer mandate penalty if you are self-employed or between jobs.

If you are approaching Medicare eligibility (65): returning from abroad while enrolled in a foreign employer group health plan may qualify as a "group health plan" event, giving you a Special Enrollment Period to enroll in Medicare Part B without late enrollment penalty. Confirm this with SSA before your return date. Delaying Part B enrollment without a qualifying event triggers a permanent 10% per-year late enrollment penalty.