Do U.S. Citizens Have to Pay Taxes on Foreign Income?

Living, working, investing, or owning property outside the United States does not necessarily remove your U.S. tax obligations. U.S. citizens are generally subject to federal income tax on their worldwide income, regardless of where they live or where the income is earned.

However, several tax provisions may help qualifying taxpayers reduce or avoid double taxation on income that is also taxed by another country.

Is Foreign Income Taxable in the United States?

Generally, yes.

U.S. citizens are typically required to report worldwide income on their federal income tax returns. This can include income earned both inside and outside the United States.

Examples of foreign income that may need to be reported include:

• Wages and salaries

• Self-employment income

• Business income

• Interest and dividends

• Investment income

• Rental income

• Retirement income

• Capital gains

The fact that income is paid into a foreign bank account does not by itself remove the U.S. reporting requirement.

What If You Live Outside the United States?

U.S. citizens living abroad generally remain subject to U.S. federal income tax filing rules.

Depending on your income and circumstances, you may still need to file a U.S. tax return even if you have lived outside the country for many years.

However, taxpayers living abroad may qualify for provisions designed specifically for foreign income.

What Is the Foreign Earned Income Exclusion?

Qualifying taxpayers living and working abroad may be able to use the Foreign Earned Income Exclusion to exclude a certain amount of eligible foreign earned income from U.S. federal income taxation.

Eligibility generally requires meeting specific requirements involving your foreign tax home and either the Bona Fide Residence Test or Physical Presence Test.

The exclusion primarily applies to earned income, so investment income and other types of income may receive different treatment.

What Is the Foreign Tax Credit?

The Foreign Tax Credit may help reduce double taxation when income is taxed by both the United States and another country.

Qualifying foreign income taxes paid or accrued may potentially be used as a credit against certain U.S. income tax liabilities.

Whether the Foreign Tax Credit or another available provision produces the better result depends on the taxpayer's circumstances.

Can You Use Both?

In some situations, taxpayers may use different international tax provisions together, subject to applicable limitations.

However, you generally cannot claim a foreign tax credit for foreign taxes attributable to income that has already been excluded under certain U.S. tax provisions.

Coordinating these benefits properly can therefore be an important part of international tax planning.

What About Foreign Investments?

Foreign investments can create additional U.S. reporting requirements beyond simply reporting the investment income.

Depending on the type and value of the assets involved, taxpayers may need to consider requirements related to:

• Foreign bank accounts

• Foreign brokerage accounts

• Foreign corporations

• Foreign partnerships

• Foreign trusts

• Certain foreign investment funds

• Other overseas financial assets

Some of these reporting obligations involve separate forms with their own filing requirements.

Do Foreign Bank Accounts Need to Be Reported?

Potentially.

U.S. persons with qualifying foreign financial accounts may have an FBAR filing requirement. Certain taxpayers may also need to report specified foreign financial assets under FATCA.

These reporting requirements are separate from determining whether the income generated by the account is taxable.

What If You Already Paid Tax in Another Country?

Paying income tax to another country does not automatically mean the income can be omitted from your U.S. return.

Instead, mechanisms such as the Foreign Tax Credit, applicable exclusions, and tax treaty provisions may help address situations where more than one country taxes the same income.

The appropriate treatment depends on the type of income and countries involved.

What If You Haven't Reported Foreign Income?

If foreign income or required international information was omitted from previous U.S. filings, it is important to understand the issue before simply submitting additional forms.

International reporting can involve specialized compliance procedures, and the appropriate approach depends on what was omitted and why.

Reviewing prior filings and foreign financial activity can help determine what corrective action may be appropriate.

Get Guidance on Foreign Income and U.S. Taxes

International tax rules can become complicated when income, investments, accounts, and tax obligations span multiple countries.

James Ridout CPA provides foreign income reporting, expat tax preparation, Foreign Tax Credit guidance, FBAR and FATCA assistance, overseas asset reporting, and international tax planning.

Have income, investments, or financial accounts outside the United States? Schedule a consultation with our team to review your U.S. tax and reporting responsibilities.