Paid tax abroad? You could still owe an extra 3.8% tax to the US

If you are an American living abroad, you may assume that paying tax in your country of residence means you will not have to pay tax on the same income again in the United States. In many situations, that is correct: Foreign Tax Credits can often reduce or eliminate regular US income tax. But there is an important exception — and two recent US court rulings have made it particularly relevant for Americans abroad.

That exception is the Net Investment Income Tax, better known as NIIT.

For Americans abroad with investments, rental property, real estate, or a business interest they may be planning to sell, it is worth understanding how NIIT works before a transaction takes place, not after.

What is NIIT?

The Net Investment Income Tax is an additional 3.8% US tax that can apply on top of regular income tax.

It can apply to investment-type income such as:

• interest and dividends
• gains from selling shares or other investments
• certain rental income
• gains from selling real estate
• certain passive business income
• other types of net investment income

NIIT can apply when your Modified Adjusted Gross Income (MAGI) exceeds a specific threshold.

For individuals, the current thresholds are:

• $200,000 for single filers and heads of household
• $250,000 for married couples filing jointly
• $125,000 for married taxpayers filing separately

The tax is calculated on whichever amount is lower:

1. your net investment income, or
2. the amount by which your MAGI exceeds the applicable threshold.

This distinction matters because you do not necessarily pay 3.8% on all of your investment income.

What has changed?

Under US domestic tax law, ordinary Foreign Tax Credits generally cannot be used to offset the Net Investment Income Tax.

Until recently, however, successful lower-court cases had raised the possibility that certain US tax treaties could provide another route to relief.

That changed on 31 August 2026.

The US Court of Appeals for the Federal Circuit ruled in two related cases involving Americans abroad: Christensen v. United States and Estate of Bruyea v. United States.

In Christensen, US citizens living in France had sold shares in a French company and paid French tax on the resulting investment income. They argued that the US-France tax treaty allowed them to use the French tax they had already paid to offset their US NIIT liability.

A lower court had agreed with them.

On appeal, however, the Federal Circuit sided with the US government. It ruled that the US-France treaty did not provide an independent Foreign Tax Credit that could be used to offset NIIT despite the limitations already contained in US tax law.

The companion case, Estate of Bruyea, concerned a US citizen living in Canada who had sold Canadian real estate and paid Canadian tax on the gain. The Federal Circuit reached the same conclusion under the US-Canada tax treaty.

The practical message for Americans abroad is important:

Eliminating your regular US income tax with Foreign Tax Credits does not necessarily mean your total US tax bill is zero. NIIT may still remain payable.

A simple example

Imagine Sarah, a US citizen living in Europe.

She earns $150,000 from her job and sells investments with a $100,000 taxable gain, bringing her income in this simplified example to roughly $250,000.

Although Sarah earns and spends in euros, amounts reported on a US tax return generally have to be converted into US dollars. The NIIT thresholds are also set in dollars, so dollars are used throughout this example.

As a single filer, Sarah’s NIIT threshold is $200,000.

Her MAGI is therefore $50,000 above the threshold.

Although she has $100,000 of investment gain, NIIT is calculated on the lower of:

• her $100,000 of net investment income, or
• the $50,000 by which her MAGI exceeds the threshold.

In this simplified example, NIIT therefore applies to $50,000.

3.8% of $50,000 = $1,900 in NIIT.

Sarah may already have paid substantial tax on the investment gain in her country of residence. Foreign Tax Credits may even reduce her regular US income tax on that income to zero.

But under US domestic law, those credits generally cannot be used to eliminate the $1,900 NIIT liability.

The recent Federal Circuit decisions also rejected attempts to use the US-France and US-Canada tax treaties to obtain a separate credit against NIIT.

That can leave Americans abroad with a US tax bill they were not expecting.

Using the Foreign Earned Income Exclusion? Read this too

There is another potential surprise for Americans abroad.

Many use the Foreign Earned Income Exclusion (FEIE) to exclude part of their foreign salary from US taxable income.

At first glance, that can make it appear that your income sits comfortably below the NIIT threshold.

For NIIT purposes, however, income excluded under the FEIE is generally added back when calculating MAGI, subject to certain adjustments.

That means someone earning a substantial salary abroad – largely excluded from regular US taxable income through the FEIE – could still have a much higher MAGI for NIIT purposes.

Add a share sale, large dividend, rental gain, or other investment income, and the NIIT threshold can suddenly become relevant.

In other words:

A low US taxable income figure does not automatically mean you are below the NIIT threshold.

Who should pay particular attention?

NIIT is particularly worth checking if you are a US citizen abroad and you:

• are planning to sell a property with a substantial gain
• are selling shares or other investments
• receive significant dividends, interest, or rental income
• are selling a business or an interest in a business that may generate investment income or capital gains
• use the Foreign Earned Income Exclusion and also have investment income
• expect an unusually high-income year

Not every investment sale or business transaction automatically triggers NIIT.

Your filing status, total income, type of income, deductions, participation in a business, and other individual circumstances can all affect the calculation.

Why planning ahead matters

The important lesson is not simply that NIIT exists. It is that timing matters.

If you know that a property, investment, or business sale is coming – or you expect a substantial amount of investment income – it is worth getting US tax advice before the transaction takes place.

A CPA or Enrolled Agent experienced in international US taxation can model the likely US tax consequences beforehand and identify whether NIIT may apply.

Depending on your circumstances, planning may involve issues such as:

• the timing of a sale
• your other income in the same tax year
• realizing gains or losses in different years
• the interaction between the Foreign Earned Income Exclusion and Foreign Tax Credits
• the US tax treatment of the particular investment, property, or business interest being sold

Once a transaction has already taken place, some planning opportunities may no longer be available.

Paid tax abroad does not always mean your US tax is zero

For Americans living abroad, two tax systems can apply to the same income.

Foreign Tax Credits are an important mechanism for reducing double taxation, but they do not necessarily protect you from every US tax.

NIIT is a good example.

Following the Federal Circuit’s decisions in Christensen and Estate of Bruyea, Americans in France and Canada cannot rely on the treaty arguments used in those cases to offset NIIT with foreign taxes already paid.

For Americans elsewhere, the broader lesson remains the same: do not assume that paying tax in your country of residence automatically eliminates every potential US tax liability.

Get Informed with Americans Overseas

If you are expecting a significant investment gain, property sale, business transaction, or another major financial event, it can be useful to understand the US tax consequences before making the decision.

Americans Overseas can connect you, free of charge and without obligation, with a US tax professional experienced in helping Americans living abroad.

That way, you can understand the potential US tax consequences in advance rather than discovering an unexpected tax bill afterwards.

Contact us for more information

US Court of Appeals for the Federal Circuit — Christensen v. United States, Case 24-1284 · US Court of Appeals for the Federal Circuit — Estate of Bruyea v. United States, Case 25-1563 · IRS Form 8960 Instructions · Bloomberg Law · KPMG Flash Alert

This article provides general information and should not be considered individual tax advice. Your tax position depends on your personal circumstances.