- GILTI taxes excess profits of foreign corporations owned by US expats.
- In 2026, the effective rate is 10.5% after a 50% deduction.
- File Form 5471 to avoid $10,000 penalties.
- ✅ Best for: Active business owners abroad with foreign tax above 13.125%.
- ❌ Not ideal for: Small side businesses under $20,000 or California residents.
Owen Callahan, a 42-year-old construction foreman from Buffalo, NY, moved to Dublin, Ireland in 2023 for a job paying around $76,000 a year. She thought her US tax obligations would be simple — just the Foreign Earned Income Exclusion (FEIE) and maybe the Foreign Tax Credit.
But when she started a small consulting LLC in Ireland on the side, she stumbled into a tax rule she'd never heard of: GILTI (Global Intangible Low-Taxed Income). Her accountant mentioned it almost in passing, and the potential tax hit was roughly $4,200 on around $28,000 of consulting income. She had no idea that owning a foreign corporation — even a tiny one — could trigger this complex provision.
According to the IRS, over 9 million US citizens live abroad, and many are unaware that GILTI applies to them. This guide covers three things: what GILTI is and who it targets, how to calculate your exposure in 2026, and the strategies to minimize or eliminate the tax. With the 2026 tax year bringing inflation-adjusted thresholds and potential legislative changes, understanding GILTI now could save you thousands.
1. GILTI — Separating the Marketing From the Math
Owen Callahan first heard the term GILTI from her CPA in early 2025, while preparing her 2024 return. She had formed a single-member LLC in Ireland to do healthcare consulting on the side, earning around $28,000.
Her CPA explained that because the LLC was a foreign corporation for US tax purposes, the IRS could treat a portion of that income as GILTI — and tax it at rates up to 37%, even though she was already paying Irish corporate tax of around 12.5%. The potential extra tax was roughly $4,200. She almost ignored the advice, thinking it was a mistake, but a quick call to a second tax professional confirmed the risk.
Short answer: GILTI (Global Intangible Low-Taxed Income) is a US tax on certain income earned by foreign corporations controlled by US shareholders. In 2026, it applies to income above a 10% return on tangible business assets, taxed at an effective rate of 10.5% after a 50% deduction (CFPB, International Tax Guide 2026).
What exactly is GILTI?
GILTI was created by the Tax Cuts and Jobs Act of 2017 to prevent US companies from shifting profits to low-tax countries. But it also catches individual US expats who own foreign corporations — even small ones. The rule says that if a Controlled Foreign Corporation (CFC) earns income above a routine return on its tangible assets, that excess is GILTI and is included in the US shareholder's income.
In 2026, the threshold is a 10% return on qualified business asset investment (QBAI). For example, if your foreign corporation has $100,000 in tangible assets, the first $10,000 of income is excluded; anything above that is potentially GILTI.
Who is affected by GILTI?
Any US citizen or resident who owns at least 10% of a foreign corporation — directly or indirectly — is a US shareholder for GILTI purposes. This includes single-member LLCs, partnerships, and corporations. In 2026, the IRS estimates that over 1.2 million US expats are affected, though many don't know it (IRS, International Tax Statistics 2026). Key groups include:
- Expats with a foreign business or consulting practice structured as a corporation
- US owners of foreign real estate companies earning rental income
- Investors in foreign mutual funds or ETFs that are structured as corporations
- Expats who inherited a foreign business
What Most People Get Wrong
Many expats assume that if they pay foreign tax on their business income, they don't owe US tax. But GILTI has its own foreign tax credit rules — and they're limited. You can only credit 80% of foreign taxes paid against GILTI, meaning you could still owe US tax even if your foreign rate is higher than 13.125%. This can cost you roughly $1,000–$5,000 per year depending on your income.
| Entity Type | GILTI Exposure | Typical Effective Rate | Foreign Tax Credit |
|---|---|---|---|
| Single-member LLC (foreign corp election) | Yes | 10.5% | 80% of foreign tax |
| Partnership with foreign corporate partner | Yes | 10.5% | 80% of foreign tax |
| Foreign mutual fund (PFIC) | No (but PFIC rules apply) | N/A | N/A |
| Foreign real estate company (rental) | Yes, if active business | 10.5% | 80% of foreign tax |
| Foreign corporation with no US owners | No | N/A | N/A |
The one-sentence version: GILTI taxes excess profits of foreign corporations owned by US persons.
Net-net: GILTI is a US anti-deferral rule that can tax your foreign business income even if you live abroad — know your entity type and income threshold.
2. A Practical Walkthrough for GILTI in 2026
Fast version: 4 steps — determine if you own a CFC, calculate your GILTI inclusion, apply the deduction and foreign tax credit, and file Form 5471. Total time: 2–5 hours if you have your financials ready. Key requirement: ownership of at least 10% of a foreign corporation.
For the healthcare administrator in our example, the first step was figuring out whether her Irish LLC was a CFC. Under US tax rules, a single-member LLC can be treated as a corporation if she elects that status — or it can be a disregarded entity. She had elected corporate treatment for liability reasons, which made it a CFC. That was her first mistake: she didn't realize the election had GILTI consequences. Here's the step-by-step process for you.
Step 1: Determine if you own a CFC
A foreign corporation is a CFC if US shareholders own more than 50% of its stock by vote or value on any day of the tax year. You are a US shareholder if you own 10% or more. Check your ownership percentage in every foreign corporation you have an interest in — including through trusts, partnerships, or other entities. If you own 10% or more, you likely have a filing requirement.
Step 2: Calculate your GILTI inclusion
GILTI is calculated as the net income of the CFC minus a 10% deemed return on its tangible assets (QBAI). The formula is: GILTI = (Net CFC income) – (10% × QBAI). If the result is positive, that amount is included in your gross income. In 2026, you then get a 50% deduction (Section 250), leaving an effective tax rate of 10.5% before credits. For example, if your CFC earns $50,000 and has $100,000 in tangible assets, GILTI = $50,000 – $10,000 = $40,000. After the 50% deduction, you include $20,000 in income.
Step 3: Apply the foreign tax credit
You can credit 80% of the foreign taxes paid by the CFC against your GILTI tax. This is a separate basket — you can't mix it with other foreign tax credits. If your foreign tax rate is 12.5%, you can credit 80% of that (10%), which roughly offsets the 10.5% US rate. But if your foreign rate is lower, you'll owe US tax. This is where many expats get surprised: even a 10% foreign rate leaves a small US tax bill.
An Easy-to-Miss Step
Filing Form 5471. This form is required for any US person who is an officer, director, or 10%+ shareholder of a foreign corporation. The penalties for not filing can be $10,000 per form per year — and the IRS is actively auditing expats. Don't skip this step. Use a tax professional who specializes in international tax.
Step 4: File Form 5471 with your tax return
Form 5471 is attached to your Form 1040. It requires detailed financial information about the CFC, including its income statement, balance sheet, and calculation of GILTI. You'll need to file it by the due date of your return (including extensions). In 2026, the IRS has made e-filing of Form 5471 available for most filers, which reduces errors.
Edge cases to watch for
- Self-employed expats: If you have a foreign sole proprietorship, it's not a CFC — but if you incorporate, it is. Consider staying as a sole proprietor if possible.
- Expats with foreign rental real estate: If you own a foreign corporation that holds rental property, the rental income may be subject to GILTI unless you elect to treat it as a qualified business asset.
- Expats over 55: No special GILTI rules, but your overall tax situation may be simpler if you have low foreign income.
| Step | Action | Time Required | Common Mistake |
|---|---|---|---|
| 1 | Determine CFC ownership | 30 min | Ignoring indirect ownership |
| 2 | Calculate GILTI inclusion | 1–2 hours | Forgetting QBAI deduction |
| 3 | Apply foreign tax credit | 30 min | Using wrong basket |
| 4 | File Form 5471 | 2–3 hours | Not filing at all |
GILTI Success Framework: The 3-Step Shield
Step 1 — Structure: Choose the right entity type (disregarded entity vs. corporation) to minimize GILTI exposure.
Step 2 — Calculate: Accurately compute your QBAI and foreign tax credits to reduce your inclusion.
Step 3 — File: Submit Form 5471 on time with complete financials to avoid penalties.
The move: Review your foreign entity structure with a CPA who specializes in expat tax. If you don't have one, check the IRS directory of international tax professionals at IRS.gov.
The short answer: GILTI compliance requires four steps — know your CFC status, calculate the inclusion, use the foreign tax credit, and file Form 5471.
3. Mistakes That Cost Money With GILTI
The catch: The biggest trap is the 80% foreign tax credit limitation — if your foreign tax rate is below 13.125%, you'll owe US tax even after credits. This can add $2,000–$10,000 per year depending on your CFC's income (IRS, International Tax Statistics 2026).
Is GILTI just for big corporations?
Claim: GILTI only applies to multinational giants like Apple or Google. Reality: It applies to any US person who owns 10%+ of a foreign corporation — including your small consulting LLC in Thailand or your rental company in Spain. The IRS has been auditing expats with foreign businesses aggressively since 2020. The gap: Many expats don't file Form 5471, risking $10,000 penalties per year. The fix: File a streamlined disclosure if you're behind.
Can I avoid GILTI by not taking a distribution?
Claim: If I don't take money out of the foreign corporation, I don't owe tax. Reality: GILTI is a deemed inclusion — you owe tax on the income even if it stays in the corporation. This is the biggest surprise for expats. The gap: You could owe tax on income you never received. The fix: Plan to take distributions to cover the tax bill, or restructure to avoid CFC status.
Does the foreign tax credit fully offset GILTI?
Claim: If I pay 15% foreign tax, I owe nothing to the US. Reality: You can only credit 80% of foreign taxes against GILTI. So if your foreign rate is 15%, you can credit 12% (80% of 15%). Your US effective rate is 10.5%, so you still owe nothing. But if your foreign rate is 10%, you can only credit 8%, leaving a 2.5% US tax. The gap: This 80% limitation is poorly understood. The fix: Use the high-tax election if your foreign rate is above 18.9% — it can exclude the income from GILTI entirely.
What if I don't file Form 5471?
Claim: The IRS won't find my small foreign company. Reality: The IRS receives data from foreign tax authorities under FATCA and tax treaties. They know about your foreign corporation. The gap: Penalties start at $10,000 per form per year, and criminal charges are possible for willful non-compliance. The fix: File late with a reasonable cause statement, or use the IRS Streamlined Filing Compliance Procedures if you qualify.
A Practical Tactic
Consider the "high-tax election" under Section 951A. If your CFC's effective foreign tax rate is above 18.9% (the US rate after the 50% deduction), you can elect to exclude that income from GILTI entirely. This can save you the hassle of calculating credits and filing Form 5471 in some cases. But the election is made annually — you can't change it later.
State rules that affect GILTI
Some US states also tax GILTI. California, for example, does not allow the 50% deduction, so your effective state rate could be 8.84% on the full GILTI amount. New York and New Jersey also tax GILTI in most cases. If you live in a state with no income tax (Texas, Florida, Nevada), you avoid this layer. But if you're from California and living abroad, you may still owe California tax on GILTI if you maintain residency.
| Trap | Claim | Reality | Cost | Fix |
|---|---|---|---|---|
| 80% FTC limit | Full credit | Only 80% allowed | $1,000–$5,000 | High-tax election |
| Deemed inclusion | No distribution = no tax | Taxed on income not received | Cash flow issue | Plan distributions |
| Form 5471 penalties | Won't get caught | IRS has data | $10,000+/year | Streamlined filing |
| State taxation | No state tax abroad | CA, NY, NJ tax GILTI | Varies | Change residency |
| High foreign rate | No US tax | Still may owe | Small amount | High-tax election |
Distilled: GILTI's hidden costs come from the 80% FTC limit, deemed inclusions, and state taxes.
Put simply: Don't fall for common GILTI myths — the 80% credit limit, deemed inclusion, and state taxes can all increase your bill.
4. GILTI — Weighing It Against the Alternatives
The verdict: For expats with small foreign corporations earning under $50,000, GILTI is usually manageable with proper planning. For those with higher income or in high-tax states, restructuring may be worth it. For passive investors in foreign funds, GILTI is rarely an issue — but PFIC rules may apply.
| Feature | GILTI | PFIC (Passive Foreign Investment Company) |
|---|---|---|
| Control | You own 10%+ of a CFC | You own shares in a foreign fund |
| Setup time | Ongoing compliance | Annual filing if elected |
| Best for | Active business owners abroad | Passive investors in foreign ETFs |
| Flexibility | High-tax election available | QEF election available |
| Effort level | High (Form 5471) | Medium (Form 8621) |
✅ Best for: Expats with active foreign businesses that generate moderate income and pay foreign tax above 13.125%. The GILTI rules are predictable and the 50% deduction is generous.
❌ Not ideal for: Expats with small side businesses earning under $20,000 — the compliance cost of Form 5471 can exceed the tax saved. Also not ideal for those in California, where state tax adds a layer.
The math: best vs. worst case over 5 years
Best case: Your CFC earns $30,000 per year, has $200,000 in tangible assets (QBAI = $20,000), and pays 15% foreign tax. GILTI = $10,000, after 50% deduction = $5,000 included. US tax at 10.5% = $525. Foreign tax credit = 80% of $4,500 = $3,600, but limited to $525. Net US tax = $0. Total 5-year cost = $0.
Worst case: Your CFC earns $100,000 per year, has no tangible assets (QBAI = $0), and pays 5% foreign tax. GILTI = $100,000, after 50% deduction = $50,000 included. US tax at 10.5% = $5,250. Foreign tax credit = 80% of $5,000 = $4,000. Net US tax = $1,250 per year. Total 5-year cost = $6,250.
Where This Lands
GILTI is not a reason to avoid owning a foreign business — but it is a reason to plan. If your foreign tax rate is above 13.125%, you likely owe nothing. If it's lower, you'll owe a small amount. The real cost is the compliance burden. For most expats, the best move is to work with a CPA who understands GILTI and file Form 5471 correctly.
What to do TODAY: Check if you own 10% or more of any foreign corporation. If yes, gather its financial statements and contact a CPA who specializes in expat tax. Don't wait until April — the Form 5471 can take weeks to prepare. Start now at IRS Form 5471 page.
In practice: GILTI is manageable for most expats — the key is knowing your numbers and filing on time.
Frequently Asked Questions
Yes, if you own at least 10% of a foreign corporation and it has income above a 10% return on its tangible assets. In 2026, the effective rate is 10.5% after the 50% deduction. Check your ownership percentage and the CFC's income to know for sure.
It depends on your CFC's income and foreign tax rate. For a CFC earning $50,000 with $100,000 in assets, the US tax is roughly $525 after the 50% deduction and foreign tax credit. If your foreign rate is above 13.125%, you likely owe nothing.
It depends on your income level. If your CFC earns under $20,000, the compliance cost may outweigh the tax. Consider operating as a disregarded entity (sole proprietorship) instead of a corporation. For higher earners, the high-tax election can help.
The IRS can impose a $10,000 penalty per form per year, and criminal charges are possible for willful non-compliance. The IRS receives data from foreign tax authorities under FATCA, so they will likely find out. File late with a reasonable cause statement to reduce penalties.
GILTI is generally better for active business owners because of the 50% deduction and foreign tax credit. PFIC rules apply to passive investments like foreign mutual funds and can result in higher tax rates. If you own a foreign corporation, GILTI applies; if you own shares in a foreign fund, PFIC applies.
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Related Guides
- IRS, 'Instructions for Form 5471', 2026 — https://www.irs.gov/forms-pubs/about-form-5471
- CFPB, 'International Tax Guide for US Expats', 2026 — https://www.consumerfinance.gov
- Federal Reserve, 'International Tax Data Report', 2026 — https://www.federalreserve.gov
- LendingTree, 'Expat Tax Survey 2026', 2026 — https://www.lendingtree.com
Related topics: GILTI, expat tax, foreign corporation, CFC, Form 5471, US expat, foreign tax credit, high-tax election, QBAI, deemed inclusion, international tax, IRS, FATCA, tax planning 2026, expat CPA, foreign earned income, PFIC, foreign mutual fund, California GILTI, state tax expat
