Is Foreign Income Taxable?
Believe it or not, US tax law requires US citizens and resident aliens to report ALL worldwide income to the IRS, including income from foreign trusts, and foreign bank and securities accounts. This applies even if you’re not currently living in the US or if you have dual citizenship. And the risk of double taxation (paying taxes to the US and to the foreign country where the money was earned) is significant. But there are a few things that can help to reduce the problem.
1. File the Right Tax Forms. In most cases, affected taxpayers need to file Schedule B, Interest and Ordinary Dividends, with their tax returns. Some taxpayers may need to file additional forms. For example, some may need to file Form 8938, Statement of Specified Foreign Financial Assets, while others may need to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, with the Treasury Department. Talk to your tax preparer or see IRS Publication 4261, for more information.
2. Foreign Earned Income Exclusion. Many Americans who live and work abroad qualify for the foreign earned income exclusion. This means taxpayers who qualify will not pay taxes on up to $95,100 of their wages and other foreign earned income they received in 2012. See Forms 2555, Foreign Earned Income, or 2555-EZ, Foreign Earned Income Exclusion, for more information.
3. Don’t Overlook Credits and Deductions. Taxpayers may be able to take either a credit or a deduction for income taxes paid to a foreign country. This benefit reduces the taxes these taxpayers pay in situations where both the U.S. and another country tax the same income.
Foreign income taxation is a tricky area, but if handled properly, the tax burden can be substantially lessened. If you have foreign income, talk to your tax professional or review IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.
By: Evan A. Nielsen, Esq. (Licensed in California)