The first US tax year abroad is the one most likely to produce a five-figure surprise — a missed exclusion, a punitive PFIC bill, or a state that never let go. Citizenship-based taxation means US persons still file from Lisbon or London the same way they filed from Denver, but the default choices that worked at home now cost money. Seven mistakes account for most of the damage, and every one of them is avoidable with a decision made before 31 December of the departure year rather than at the return-filing deadline eighteen months later.
This article walks through those seven, in the order they typically bite. It is informational only; anyone actually filing a first-year expat return should engage a qualified cross-border preparer.
1. Claiming the Foreign Earned Income Exclusion without qualifying
The Foreign Earned Income Exclusion (FEIE) is the headline number every first-year expat quotes: $132,900 of foreign earned income excluded for tax year 2026. The mistake is treating it as a switch to be flipped rather than an election that requires clearing a specific residence or presence test — and the departure year is the year most likely to fail both.
Two qualifying paths exist. The physical presence test requires 330 full days of physical presence in a foreign country or countries during any 12-month period. The bona fide residence test requires an uninterrupted period that includes at least one full tax year (1 January to 31 December for calendar-year filers). Someone who leaves the US in June and spends the second half of the year settling in Lisbon has met neither: not 330 days in any qualifying 12-month window ending in that tax year, and not a full calendar year of bona fide residence.
The fix is usually to file Form 2350 to request an extension to the FEIE qualifying date rather than defaulting to the April deadline. The extension buys time for the 12-month physical-presence window to complete. Filing FEIE prematurely — before the 330 days have actually elapsed — creates an inaccurate return that has to be amended or, worse, triggers audit exposure when the return is reconciled against travel history.
2. Missing the Foreign Tax Credit carryover
The FEIE is not always the better choice, and in high-tax jurisdictions it is often actively worse. The UK's top marginal rate is 45% (higher in Scotland at the top band), and Portugal's tops out at 48% plus a solidarity surcharge of 2.5-5% on high incomes. Both are meaningfully higher than the equivalent US marginal rate on the same income. That gap generates excess foreign tax credits under the Foreign Tax Credit (FTC), which — unlike the FEIE — carry back one year and forward ten.
The first-year mistake is to elect FEIE reflexively, exclude the first $132,900, and leave the remaining foreign-taxed income to the FTC — forfeiting the ability to bank a decade of excess credits against future US tax on unrelated income (US-source consulting, capital gains, Roth conversions). Someone earning £120,000 in London who elects FEIE first typically leaves five figures of credits unused.
The reverse mistake is also common: electing FEIE and then trying to switch to FTC in a later year. Revoking a FEIE election locks the taxpayer out of re-electing for five years absent IRS consent. This is a decision to model, not to default. See FEIE vs Foreign Tax Credit for a side-by-side.
3. Choosing physical presence when bona fide residence fits better (or vice versa)
Even when FEIE is the right answer, the qualifying test itself is often chosen wrong. Physical presence is mechanical: 330 full days out of any 12-month window. It works well for the highly mobile — digital nomads, frequent US-return travellers, anyone whose stay abroad is short or uncertain.
Bona fide residence is judgemental: an uninterrupted period including a full tax year, evidenced by housing, family, work permit, and intent. It is harder to establish in year one — most expats cannot meet it because they only arrived mid-year — but it is far more forgiving in subsequent years. A bona fide resident can spend materially more time in the US than the 35-day physical-presence buffer without losing status, provided the ties abroad remain primary.
The first-year mistake is establishing physical presence in year one and then hitting a US trip in year two that blows the 35-day allowance, forfeiting the exclusion entirely for that year. Setting up for bona fide residence from arrival — leasing a permanent home, registering with local authorities, obtaining a residence permit — costs nothing extra and preserves flexibility for later.
4. Ignoring foreign pension contributions
Every US employee is used to 401(k) contributions being pre-tax. The instinct carries abroad and creates a specific first-year mistake: assuming employer and employee contributions to a foreign pension enjoy the same US tax treatment.
They generally do not. UK workplace pensions, Portuguese PPR plans, Australian superannuation, and most European occupational schemes are not qualified plans under IRC §401(a). Absent specific treaty protection, employer contributions are typically US-taxable as compensation in the year contributed, and the inside build-up may be taxable annually depending on how the plan is characterised. Some plans are treated as foreign grantor trusts under §402(b), triggering Form 3520 and 3520-A reporting.
Treaty relief exists in some cases — the US-UK treaty, for example, provides election-based deferral for pension contributions under Article 18 — but the elections must be made on the return, on time, with adequate disclosure. A silent return that treats a foreign pension like a 401(k) is not compliant; it is a deferred audit. Treatment varies significantly by country and plan type, so verify with a treaty-versed adviser.
5. Buying a Passive Foreign Investment Company by accident
Nearly every non-US mutual fund, ETF, and pooled investment vehicle is a Passive Foreign Investment Company (PFIC) in the hands of a US person. This includes UCITS funds sold across the EU, UK-domiciled ETFs, Portuguese fundos de investimento, and — critically — investments held inside otherwise tax-advantaged wrappers like a UK ISA or a Portuguese PPR.
The PFIC regime is designed to be punitive by default. Without a Qualified Electing Fund (QEF) or mark-to-market election — neither of which most foreign funds facilitate for US shareholders — gains on sale are taxed at the highest ordinary rate applied over the entire holding period, plus an interest charge on deemed deferred tax. Form 8621 must be filed for each PFIC each year. A first-year expat who opens a local brokerage account and buys the standard menu of "sensible" index funds has typically acquired 6-10 PFICs within a single month.
The practical answer is nearly always to keep investment accounts at a US brokerage that permits non-US-resident addresses (a shrinking list — Interactive Brokers and Schwab International are common), hold US-domiciled ETFs, and use local accounts only for cash management. Someone already invested in local funds needs a targeted exit plan, not a wait-and-see approach — every year of continued holding compounds the PFIC calculation. See the PFIC rules for US expats deep-dive for the mechanics.
6. Missing the FBAR
The FBAR — FinCEN Form 114 — is required whenever the aggregate maximum balance across all foreign financial accounts exceeds $10,000 at any point in the year. It is not an IRS form; it is filed separately with FinCEN, and the $10,000 threshold applies to the combined peak, not per-account.
Three first-year mistakes recur. First, treating "financial account" narrowly — the definition covers not just bank accounts but foreign brokerage, some pension accounts, and any account over which the US person has signature authority (a foreign employer's petty-cash account can count). Second, forgetting joint accounts held with a non-US spouse. Third, missing the deadline: FBAR is due 15 April with an automatic extension to 15 October — no form required — but the FBAR extension does not extend the underlying IRS return.
Willful FBAR penalties are among the highest in the US tax code, up to the greater of $100,000 (indexed) or 50% of the account balance per violation. First-time non-willful failures typically resolve through the Streamlined Foreign Offshore Procedures, but that program has its own eligibility rules and time limits.
7. Leaving state residency undone
Federal law is only half the exposure. A handful of US states — California, New Mexico, South Carolina, and Virginia — are notoriously reluctant to concede that a taxpayer has left. Californians in particular face a domicile test that weighs factors including where the family lives, where vehicles and pets are registered, where professional licences are held, where doctors and dentists are seen, and where mail is delivered. Physical absence alone does not sever domicile.
The first-year mistake is treating the move as a factual event ("I'm out of the state, therefore I'm not a resident") rather than an evidentiary one. Someone who moves to Lisbon but keeps a California driver's licence, a US mailing address at a family member's house, an active gym membership, and a rented storage unit is inviting a residency audit that can reach several years back.
Severing state residency before departure — filing a part-year return, changing licences, closing state-specific accounts, updating voter registration, and establishing evidence of a new permanent home abroad — takes weeks of paperwork and prevents a state tax liability that FEIE and FTC do nothing to shield against. The state residency severance guide walks through the specific paper trail; the California residency audit post covers the sticky-state playbook in more detail.
The compounding problem
These seven mistakes rarely appear singly. The typical first-year expat return that arrives late for professional cleanup shows FEIE claimed prematurely, PFICs bought in a local ISA, an FBAR missed, and California still asserting residency — because the same instinct (treat the move as complete on the day the flight lands) drives all of them.
The corrective posture is to treat the departure year as an 18-month project rather than a discrete event: pre-departure state severance, careful account architecture, a FEIE-or-FTC decision informed by the destination country's marginal rate, and a written plan for foreign pension contributions before the first payslip clears. As of 2026, the FEIE cap, standard deduction ($16,100 single / $32,200 MFJ), and estate-tax exemption were updated under the One Big Beautiful Bill Act signed in July 2025. Figures change annually — any decision worth making is worth verifying with a cross-border adviser at the time of filing.
Where to go next
For the FEIE-versus-FTC decision, see FEIE vs Foreign Tax Credit. First-year filers who have already missed a year should read the Streamlined Filing guide. For destination context, review the United States, United Kingdom, and Portugal country profiles, or use the country comparison tool to model marginal-rate differences before departure. The US expat tax return checklist covers the mechanical forms year by year.