Ten years ago, when I was working for a tiny nonprofit on a shoestring budget, I’d hear people grumbling about US tax reporting obligations and roll my eyes. I figured anyone complaining was earning more than the FEIE amount ($132,900 per person in 2026) or doing their taxes majorly wrong. Now I realize I was clueless.
After bouncing from the US to Canada, then to Portugal, and now staring down a future in Italy, I’ve realized that being an American abroad isn’t carefree at all. My life has officially become the world’s most boring video game. It’s a 24/7 quest through immigration paperwork delays, special circumstances that break automated systems, and contradictory tax laws.
I was reading the 1440 over my morning coffee and this made me realize how much my perspective on life has changed:
“France sold a $1M Picasso painting to a Parisian sales engineer for 100 euros ($117) yesterday. The sale was part of a charity raffle that collectively raised 12 million euros ($14M) for Alzheimer’s research.”
Instead of thinking “How cool!” I imagined the 37% federal tax bracket and spending days trying to get tax software to calculate things correctly.
We all have that “if I won the lottery” fantasy. One million is enough to buy a fixer-upper in my hometown or a nice house in Verbania. But after a decade of navigating international bureaucracy, I’ve realized that for an American living abroad, a winning ticket would probably be the start of a nightmare. You can’t use the FEIE to cancel out prizes…or even retirement income.
If you get a $1 million Picasso for 100 euros, the US taxes you as if you earned $1 million in taxable income. They don’t care about what you paid (your 100 euro ticket), they care about the fair market value ($1 million). At the top federal bracket (currently 37%), you would owe around $350,000 in federal income taxes alone, plus potential state taxes if you didn’t convince the last US state he lived in that you cut all ties.
You’d have to sell the painting just to pay the tax bill. Only it’s not that simple.
Let’s say you decide to sell the painting the next day, so you’ll have cash to pay your taxes.
Since the painting was assessed by the charity, we know the FMV. The moment you win, the IRS treats it as if you received $1,000,000 in cash and then immediately used that cash to buy the painting. This, along with any expenses tied to the asset transfer, is the cost basis.
If you sell the painting for exactly $1M the next day, you have $0 in capital gains. The problem is that the $1M spike in ordinary income pushes you up to that 37% tax bracket, so you’ll still owe that $350k in federal taxes. Since your income is over $250,000 (for married filing jointly), you also get hit with the Net Investment Income Tax (NIIT) of 3.8%. You might also owe taxes in France. While you can use the foreign tax credit to avoid double taxation, you end up paying the higher rate.
That’s still $650k in your bank account at the end of it. Only it’s not, because selling it involves commission fees that will probably be 10-20%.
Let’s say you sell the painting for $1M the day after you win it, but after fees you only get $850k. You still owe taxes on the full million and then claim a capital loss of $150k. It seems like it’d even out, right? Only it doesn’t. You can probably only apply $3,000 of that loss each year, so you’ll be using $3k a year for the next 49 years.
Okay, it’s still something like $450,000 in free money. But it’s complicated money. And it’s a lot less than a million. We’ve moved from buying a nice house in Verbania to buying a condo. Plus, when I fantasize about winning the lottery I’m not fantasizing about having to track it for my taxes for the next 50 years. Isn’t there a better way?
Let’s say you decide to just donate the painting. You might think donating a $1M painting would wipe out the $1M income tax, but the IRS has opinions on this. Under related use rules, if you donate it to a museum that displays it, you can probably deduct the full fair market value, potentially offsetting the income from the win. If you donate it to a museum that turns around and sells it to raise cash, your deduction is limited to your cost basis. In this case, it should be fine, since the cost basis and FMV are going to be the same anyway.
The problem is that charitable deductions are usually capped at 30% of your AGI per year, meaning you might be carrying it forward for a while. Instead of +1M and -1M, it would be +1M and -300k…leaving a taxable passive income of $700k you still owe taxes on.
It gets even worse.
- You can only deduct the portion of your donation that exceeds 0.5% of your AGI. On a $1M win, you lose the first $5,000 of your deduction immediately.
- A new 2026 rule caps the value of itemized deductions at 35%. You’re paying 37% on the income but only getting a 35% “discount” from the donation. You lose 2% on every dollar.
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You can’t just tell the IRS it’s worth $1M because the raffle said so. To claim a deduction over $5,000, you must hire a qualified appraiser and file Form 8283. The IRS Art Advisory Panel (maybe the coolest job to have at the IRS?) reviews all donations over $50,000. If they decide the Picasso is only worth $800k, your deduction shrinks, but your “win” value might stay at $1M if that’s what was documented at the time of the prize.
- Unless you have a much higher income than mine, that carryover wouldn’t be very useful in lowering your future tax bill.
So even after donating the painting, you’d still have a $230k tax bill. Since you donated the painting, there are no sale proceeds to pay the taxes with.
Let’s say you decide to empty out your retirement accounts to pay the taxes and keep the painting. To get $350k net to pay the IRS, you’d have to withdraw roughly $550k from your 401k/IRA. This is because you pay ordinary income tax on the withdrawal PLUS a 10% early withdrawal penalty (if you’re under 59 ½).
If you manage to come up with the $350k to pay the IRS and you keep the painting, its at least simple to sell later. Since your cost basis is $1M, you only owe taxes on the profit above that. Collectibles held for more than a year are taxed at a maximum 28% capital gains tax rate. Hopefully the painting appreciates and you end up with a high enough sale price to make up for all the costs.
What if you just renounce your US citizenship before you get the prize? You have to be a dual citizen in order to do this, since the US doesn’t allow you to become stateless. To avoid the tax, you must renounce before you have the legal right to the prize. If the drawing has happened and your name is on the ticket, the IRS can argue you have “constructive receipt.” Renouncing after the win but before picking up the painting is usually seen as a fraudulent transfer to avoid taxes. Renunciation takes months to schedule an appointment at an embassy, so unless the raffle has a very long lead time, you won’t be able to even try this.
Even if you renounce the next day, you owe the tax for the part of the year you were a citizen—which includes the moment you won. The IRS may or may not notice this at the time, but if they discover it later, they can come after you and use the Reed Amendment to bar you from ever returning to the US.
When there are unlikely but incredibly serious consequences and little reliable information, it leads to over-compliance. I felt like a fool when I discovered there was no need to worry about crossing the US/CA border by air (or any other method) with expired documents. People had told me that as an American it didn’t matter, but no one could explain why. I didn’t want to get stranded and lose my status in Canada. It turns out there’s a special set of rules for Americans and Canadians entering each other’s countries. I put in a lot of extra effort for no reason. Today a million dollars is really not a lot of money to the IRS. Would anyone really notice or care?
But then there’s Richard Hatch, the first winner of Survivor. He won $1 million and didn’t report the prize money to the IRS. Six years after his glorious win, he was convicted of tax evasion and spent 3 years in federal prison. His debt has ballooned with back taxes, interest, and penalties, in a nightmare that continues.
Boris Johnson, the former UK Prime Minister, is another famous example. Born in New York, he left the US as a child. When he sold his London home in 2014, the IRS tracked him down and demanded he pay US taxes on the sale. He eventually had to pay the bill to the IRS before he could renounce his citizenship.
It’s not just the famous who end up catching the attention of the IRS. It happens to “accidental Americans” all the time. Foreign banks are required to report to the IRS if you’re a US person. When you open an account, they note your citizenship and place of birth. You might not notice this, because they pull the information from your passport.
This FATCA reporting information is reviewed every year — something I was reminded of when my Portuguese bank account was frozen. I opened a Portuguese bank account while living in Canada. I let them know I was a US citizen and provided my SSN, SIN, and NIF. When they did their annual review and saw I was born in the US, my bank account was frozen. It took multiple in-person trips to the bank to figure out why my account was frozen and sort it out. It turns out Caixa GD only has two slots in the database for tax IDs, so the clerk decided not to enter my SSN. This is a big mistake that could have resulted in huge penalties for the bank. Luckily for me, I file my FBAR and 1040 every year, so I wasn’t at risk for the massive non-compliance penalties.
If a US citizen has a large influx of cash into their bank account anywhere in the world, the bank reporting triggers an IRS audit. Some people who were born in the US or have citizenship through their parents but no ties to the US don’t realize they should be filing US taxes every year…until the IRS tracks them down and demands huge sums of back taxes, interest, and penalties. Those penalties are rarely actually enforced…but who wants to risk it?
I put a lot of effort into getting my taxes filed correctly, yet I’m never confident that I got it entirely right. Friends who have experts do their taxes also find mistakes when they’re audted, so it doesn’t seem like a problem you can buy your way out of. Since expat tax specialists set their fees based on the ultra rich, it’s not really an option anyway. The issue is that tax laws aren’t always clear and if you’re living abroad you’re likely to find yourself in the gray areas of the tax code.
When my wife casually talks about spending a year in Japan or buying a vacation home in Spain, my blood pressure spikes. I just imagine a new set of rules layered on top of the others, a new language to learn, and a new set of accounts to keep track of (and report!).
So, while everyone else is out there buying Powerball tickets, I’m fantasizing some way to make my taxes simpler. True wealth isn’t a million-dollar jackpot; it’s a year where I don’t have to file an amended return.
Photo by Nick Fewings on Unsplash
