US Tax Return Preparation for Expats Moving to Monaco

US tax return preparation for expats moving to Monaco starts from one uncomfortable fact: the Principality's lack of a personal income tax does nothing to switch off your US filing obligation. An American is taxed on citizenship, not residence, so a move from London to Monaco swaps a high-tax foreign country for a no-tax one while the Form 1040 carries on exactly as before. What changes is the arithmetic. The UK income tax that used to offset your US bill disappears, and with it most of the relief you relied on in London.

For an investor, executive or entrepreneur, that shift lands hardest on investment income. Dividends, interest and capital gains realised while you live in Monaco are generally taxed in full by the United States, with no foreign tax to credit and no income tax treaty to soften the result. Layered on top is a UK departure year that has its own rules, a fresh set of foreign accounts to report and, very often, a portfolio of European funds that the US tax code treats harshly. This guide walks through each piece in the order we work through it when preparing the returns.

Do US Citizens Living in Monaco Still Have to File a US Tax Return?

Yes. The IRS states plainly that citizens and resident aliens living abroad are subject to tax on worldwide income from all sources, and that the filing rules are generally the same whether you live in the United States or overseas, as set out at https://www.irs.gov/individuals/international-taxpayers/us-citizens-and-resident-aliens-abroad. Moving your home to Monaco therefore changes where you live, not whether you file. Once your income clears the ordinary filing thresholds, which it will for almost any high-net-worth household, a full-year Form 1040 is due for every year you hold a US passport.

Monaco's own position is the mirror image. The Principality does not levy a general personal income tax on its residents, which is the reason most people choose it. That is a statement about Monegasque tax, and it carries no weight in Washington. A US citizen resident in Monaco is, for US purposes, simply a citizen with foreign income and foreign accounts, and every reporting rule that applied in London continues to apply on the Riviera.

Is There a US-Monaco Income Tax Treaty?

No. The IRS list of United States income tax treaties at https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z includes the United Kingdom and France, but Monaco does not appear on it. There is no treaty tie-breaker for residence, no reduced US withholding on US-source dividends paid to a Monaco resident by virtue of residence there, and no treaty article to rely on for any category of income. Once you leave the UK, there is no treaty framework coordinating your US return with your country of residence.

Why Does Monaco's Zero Income Tax Leave Your Investment Income Fully US-Taxed?

The Foreign Tax Credit, claimed on Form 1116, is a dollar-for-dollar credit for foreign income tax you actually paid or accrued. In London, UK tax on salary, dividends and gains usually equalled or exceeded the US tax on the same income, so the credit eliminated most or all of the US liability. In Monaco there is no income tax on that income, so there is nothing to put on Form 1116. The US tax that the UK credit used to absorb now becomes a cash cost.

The Foreign Earned Income Exclusion cannot fill the gap for investors, because it applies only to earned income. The IRS defines foreign earned income at https://www.irs.gov/individuals/international-taxpayers/foreign-earned-income-exclusion as wages, salaries, professional fees and other amounts paid for personal services you perform. Dividends, interest, rents and capital gains are not payment for personal services, so they sit outside the exclusion entirely. For a client whose wealth produces most of their income, the Monaco move often leaves the US liability higher than it was in London, not lower, because the UK tax that was being credited has vanished while the US tax on the portfolio has not.

Can You Claim the Foreign Earned Income Exclusion and Housing Exclusion in Monaco?

If you still work, yes, provided you meet the conditions. You need foreign earned income, a tax home in a foreign country, and either the bona fide residence test or the physical presence test. The bona fide residence test requires genuine residence in a foreign country for an uninterrupted period that includes an entire tax year. The physical presence test requires at least 330 full days in a foreign country during any 12 consecutive months. Because you are moving from one foreign country to another, the London months and the Monaco months can both count toward the physical presence test, which often makes the departure year easier to qualify than an arrival year from the United States.

• Earned income only: salary from a Monaco or other non-US employer, director fees for services you perform, and self-employment profits can qualify, but dividends from your own company generally do not
• Annual limit: the maximum exclusion is indexed for inflation each year, and it is pro-rated when your qualifying period covers only part of the calendar year
• Housing amount: qualifying foreign housing costs above a base amount can be excluded by employees, or deducted by the self-employed, subject to limits that vary by location
• Self-employment tax: the IRS is explicit that the exclusion reduces regular income tax but will not reduce your self-employment tax
• No double benefit: tax on income you have excluded cannot also be credited, so once Monaco tax is nil the exclusion is usually the only relief left for earned income

There is one consequence of stacking that catches executives out. When you claim the exclusion, the tax on your remaining, non-excluded income is calculated at the rates that would have applied if you had not excluded anything, as the IRS notes on the same page. A large Monaco portfolio sitting on top of an excluded salary is therefore taxed starting from the higher brackets, not from the bottom. The exclusion shelters the salary, but it pushes the investment income up the rate table.

How Does the 3.8% Net Investment Income Tax Apply in Monaco?

The Net Investment Income Tax adds a further layer that many new Monaco residents do not expect. According to the IRS at https://www.irs.gov/individuals/net-investment-income-tax, it is a 3.8 percent tax on the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds a statutory threshold. Those thresholds are 200,000 dollars for single filers and heads of household, 250,000 dollars for married couples filing jointly, and 125,000 dollars for married filing separately. Net investment income includes interest, dividends, capital gains, rental and royalty income and non-qualified annuities.

Nothing in the NIIT rules exempts a citizen because they live abroad. For a high-net-worth household in Monaco the tax is effectively a near-certain addition to the bill on investment income above the threshold, and because there is no Monaco income tax there is no foreign tax available to reduce it. When we prepare a first Monaco-year return, Form 8960 is very often the schedule that surprises the client most.

How Do You Handle the UK Departure Year When Leaving London for Monaco?

The year you leave London is really two separate exercises run in parallel. On the US side nothing splits: the Form 1040 covers the full calendar year, with UK-taxed income in the London months and untaxed income in the Monaco months. On the UK side, the Statutory Residence Test decides whether you are UK resident for the tax year running from 6 April to 5 April, and split-year treatment may divide that year into a UK part and an overseas part. HMRC's guidance note at https://www.gov.uk/government/publications/rdr3-statutory-residence-test-srt/guidance-note-for-statutory-residence-test-srt-rdr3 explains that an actual departure in a UK-resident year requires you to consider split-year Cases 1 to 3.

• Case 1: leaving to work full-time overseas, which suits an executive taking up a full-time role based in Monaco
• Case 2: the partner of someone who qualifies under Case 1 and who moves overseas to join them
• Case 3: ceasing to have any home in the UK and establishing your presence overseas, which is the case most retiring or investing clients rely on, and which an empty but still available London flat can easily defeat
• Priority rules: where more than one case could apply, HMRC's ordering rules decide which one governs the date the UK part of the year ends

Each case has conditions that must all be met, and failing one leaves you UK resident for the whole tax year. For US preparation this matters directly, because UK tax paid on income in the UK part of the year is creditable on your Form 1116 under the US-UK treaty framework, while income after the split date is not UK-taxed and so carries no credit. Getting the split date right is what lets the departure-year return apportion credits correctly between the London months and the Monaco months.

Which UK Ties Can Keep You UK Resident After You Move?

In the years after departure, you are tested again each year. Because you were UK resident in one or more of the previous three tax years, HMRC's RDR3 guidance places you in the stricter of its two tables, and adds a fifth tie, the country tie, to the usual four. The more UK days you spend, the fewer ties it takes to make you resident: more than 120 days needs only one tie, 91 to 120 days needs two, 46 to 90 days needs three, and 16 to 45 days needs four.

• Family tie: a spouse, civil partner, partner or minor child who is UK resident
• Accommodation tie: a place in the UK available to you for a continuous period, used at least once in the year
• Work tie: a meaningful amount of work carried out in the UK, a common risk for executives who still attend London board meetings
• 90-day tie: more than 90 UK days in either of the two previous tax years
• Country tie: the UK being the country in which you spent the most days in the year, which only applies to people who were UK resident in at least one of the three previous years

What Is the UK Temporary Non-Residence Rule and Why Does It Matter?

Temporary non-residence is the UK rule that claws back certain income and gains if you return too soon. HMRC's guidance explains that it can apply where you had sole UK residence in four or more of the seven tax years immediately before the year you left, and your period of non-residence lasts five years or less. If both are true, specified income and gains received during your absence may become taxable in the UK in the year you return. The non-exhaustive list includes capital gains, distributions from closely controlled companies, offshore income gains and chargeable event gains.

This creates a timing mismatch on the US side that few guides address. A gain you realise in your second Monaco year is US-taxed in that year, with no foreign tax to credit. If you then return to London within the five-year window, the UK may tax the same gain in the year of return. Whether and how that later UK tax can be credited against the earlier US tax depends on the foreign tax credit timing rules and the treaty, and it frequently requires an amended US return for the earlier year. In the returns we prepare, we record the departure date, the five-year window and the specific gains realised during it, so that a return to the UK does not turn into a reconstruction exercise years later.

What About Unused UK Foreign Tax Credits After the Move?

This is the second gap that most commentary misses. Years of high UK tax on a London salary often leave a client with excess foreign tax credits that could not be used at the time and were carried forward. Those carryovers are not lost when you move to Monaco, but they can only be used against US tax on foreign-source income in the same category, and only where there is room under the credit limitation. The Monaco years can actually create that room, because foreign-source earned income that you choose not to exclude, or foreign-source passive income, attracts US tax with no new foreign tax to set against it.

Carryovers expire after a limited number of years, so where there is Monaco salary we compare a return claiming the exclusion against one that leaves the salary taxable and absorbs UK carryovers instead. That comparison needs the full Form 1116 carryover schedules from the London years.

Do You Need an FBAR and Form 8938 for Monaco Bank Accounts?

Almost certainly. Residence in Monaco usually means opening local accounts, and if the aggregate value of your foreign financial accounts exceeds 10,000 dollars at any time during the calendar year, you must file an FBAR on FinCEN Form 114 through FinCEN's BSA E-Filing System, separately from your tax return. The IRS comparison at https://www.irs.gov/businesses/comparison-of-form-8938-and-fbar-requirements confirms the threshold is cumulative across all accounts. In the departure year the FBAR will normally list both the UK accounts you still hold and the new Monaco accounts.

Form 8938 is a separate FATCA disclosure attached to the Form 1040. For taxpayers living abroad, the same IRS page sets the threshold at more than 200,000 dollars on the last day of the year or more than 300,000 dollars at any time for single filers, and more than 400,000 dollars at year end or more than 600,000 dollars at any time for married couples filing jointly. Foreign mutual funds are reportable on both forms. For most Monaco clients both filings are required every year, and they must reconcile to each other and to the income reported on the return.

Are European Funds a PFIC Problem After Moving to Monaco?

Very often, yes. A Passive Foreign Investment Company is, broadly, a non-US company whose income is mainly passive or whose assets mainly produce passive income, and most non-US mutual funds, ETFs and money-market funds fall within that definition. Portfolios built by European private banks and wealth platforms are typically full of them. Each PFIC generally requires a Form 8621, and without an election the default excess distribution regime can tax gains and certain distributions at the highest ordinary rate with an interest charge, rather than at capital gains rates.

In London, UK tax on fund income at least produced a credit against that US charge. In Monaco there is none. A qualified electing fund election, where the fund supplies the required information, or a mark-to-market election for marketable shares can be far less punitive, but both have timing rules, so a fund-by-fund PFIC inventory is one of the first things we build for a new Monaco client.

Does a Social Security Totalization Agreement Cover Monaco?

No. The Social Security Administration's table of international agreements in force, published in its POMS manual at https://secure.ssa.gov/poms.nsf/lnx/0201701005, lists 31 countries including the United Kingdom and France, but not Monaco. While you worked in London, the US-UK agreement determined which country's system covered you. Once you live and work in Monaco, there is no agreement to allocate coverage between the two systems.

The practical consequence depends on how you earn. A US citizen who is self-employed abroad generally remains liable for US self-employment tax on net earnings, reported on Schedule SE, and the Foreign Earned Income Exclusion does not reduce it. Without a totalization agreement, that liability cannot be switched off by a certificate of coverage, and Monaco's own social contributions may apply to the same activity. Employment by a US company, or an arrangement that brings wages within US coverage, can likewise produce contributions in both countries, so we confirm the coverage position before the first Monaco-year return is prepared.

Can a US State Still Tax You After You Move to Monaco?

Possibly. State residence is governed by each state's own rules, and some states look at domicile, retained homes, driver's licences, voter registration and intent to return rather than physical presence. A client who kept ties to a high-tax state while in London may still be treated as domiciled there. The move is the moment to confirm the position and, where needed, file a final part-year state return with a clear cut-off date.

What Are the Filing Deadlines for US Expats in Monaco?

Taxpayers living overseas get an automatic two-month extension to file, but the IRS states on its page for citizens abroad that interest is still charged on any tax not paid by the regular April due date. For a Monaco resident with large untaxed investment income, April is therefore the real payment deadline, and quarterly estimated payments are usually needed to avoid underpayment penalties.

• 15 April: regular due date for the Form 1040 and for paying any balance of tax, with interest running from this date on anything unpaid
• 15 June: automatic extended filing date for taxpayers whose home and main place of business are outside the United States
• 15 October: extended filing date where Form 4868 is filed before the June deadline
• FBAR: generally due by 15 April, filed electronically and separately from the tax return
• Form 8938 and Form 8621: attached to the Form 1040 and due with it, including extensions

Worked Example: A London Investor's First Full Year in Monaco

The following is an illustration with invented figures, not a real client, and uses round numbers to show the mechanics only. Assume a single US citizen who lived in London for eight years and moved to Monaco in August, qualifying for UK split-year treatment under Case 3. In the following calendar year, their first full Monaco year, they have no earned income and receive 900,000 dollars of dividends and long-term capital gains from a portfolio held in Monaco and US accounts.

On the Form 1040, all 900,000 dollars is taxable in the United States. There is no Monaco income tax, so there is no current Foreign Tax Credit, and the Foreign Earned Income Exclusion is irrelevant because none of the income is earned. The qualified dividends and long-term gains are taxed at the US preferential rates, and the Net Investment Income Tax applies on top: modified adjusted gross income of 900,000 dollars exceeds the 200,000 dollar single threshold by 700,000 dollars, which is less than net investment income of 900,000 dollars, so NIIT is 3.8 percent of 700,000 dollars, or 26,600 dollars.

Now add two complications that are common in practice. First, assume 150,000 dollars of the gains came from European funds that are PFICs with no election in place; those gains are recalculated under the excess distribution rules on Form 8621 and can be taxed at the top ordinary rate with an interest charge instead of at capital gains rates. Second, the client sold shares in their own UK company in the same year. Because they were UK resident in more than four of the seven years before leaving, that gain would fall back into UK tax in the year of return if they moved back to London within five years. The US return, the PFIC schedules and the UK five-year window therefore have to be prepared and documented together.

What Records Does US tax return preparation for expats in Monaco Require?

Clean US tax return preparation for expats in Monaco is mostly about collecting the right records once, at the point of the move, rather than rebuilding them later. These are the items we ask for before preparing the departure-year and first Monaco-year returns:

• Exact travel dates in and out of the UK, Monaco and the United States, with a running UK day count and a 330-day physical presence count
• The UK split-year analysis, identifying the case relied on and the date the UK part of the year ends
• UK P45, payslips and evidence of UK tax paid for the London months, to support the Foreign Tax Credit
• Prior-year Form 1116 carryover schedules for each credit category
• Opening dates and maximum balances for every UK and Monaco account, for the FBAR and Form 8938
• A full holdings list for every portfolio, with each non-US fund identified as a potential PFIC and any elections already made
• Employment contracts, director appointments or company records for any work done from Monaco, to assess the exclusion and self-employment tax
• Records of any remaining US state ties, including property, licences and voter registration

Related reading and tools

• US Tax Services & IRS Compliance
• UK Tax Services
• IRS Streamlined Filing
• UK Income Tax Calculator
• US Federal Income Tax Calculator

Every situation is different. Book a cross-border tax consultation to discuss how these rules apply to you.

Authoritative sources

IRS — Streamlined Filing Compliance Procedures

FinCEN — Report of Foreign Bank and Financial Accounts (FBAR)

HM Revenue & Customs

GOV.UK — Tax on foreign income

IRS — Foreign Earned Income Exclusion

IRS — Foreign Tax Credit

ICAEW

Chartered Institute of Taxation (CIOT)

AICPA

MoneyHelper (UK)