Many people who earn income overseas are confused about how their incomes work with the IRS and the American taxation system. To that end, here are a few commonly-asked questions that people ask about foreign incomes, foreign, investments, and the US expat tax. The answers will provide some clarifications and offer insight into how you can pay less tax.
How is my foreign income taxed?
You must report any and all income and foreign investments to the IRS if you are an American citizen, whether you still live in the country or not. This is the first and most important rule about these types of incomes. To not mention these on your tax forms is a type of fraud, so no matter what, always report all of your foreign wages and investments to the IRS. The specifics on how you will be taxed varies, but the general rule of the US expat tax is this: For any foreign taxes that you have paid on these investments and wages, the IRS will allow you a deduction or credit on your tax return. This is a way to avoid paying double the tax while still paying any amount still required by the American government.
Do I qualify for the foreign earned income exclusion?
The foreign-earned income exclusion has three basic requirements, which are as follows (more information on these requirements can be found in the US expat tax section on the IRS website):
1. A U. S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,
2. A U. S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
3. A U. S. citizen or a U. S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
Can I take advantage of the foreign tax credit? How does it work?
The foreign tax credit is the aforementioned program that the IRS has in place to help expats avoid paying taxes multiple times on the same income. It applies directly to anyone who has paid foreign taxes that qualify for the credit. You will need to report your foreign taxes to the IRS, who will then offer you either a US expat tax credit or an itemized deduction based on the taxes that you have already paid.
When you live abroad or have investments overseas, the money you earn is still subject to American taxation. That being said, the deductions and exemptions can become quite confusing without the right person to help you. That is why it pays to employ the services of an experienced tax consultant who understands the US expat tax. If you have any foreign income, be sure to use only qualified and experienced tax experts to help you avoid paying unnecessary taxes.
Esquire Group, a boutique international tax advisory firm specializing in tax consulting, tax planning and compliance and helping corporate and individual taxpayers with Offshore Voluntary Disclosure Program, asset protection, and US expat taxes. To learn more about us, visit EsquireGroup/about.