Foreign Income: Is It Taxable?January 23, 2018
Many U.S. citizens and resident aliens receive income from foreign sources...is this money taxable?
If you’re a U.S. Citizen or resident alien, do you have to report income from all sources within and outside of the U.S.? Foreign income is taxable in the United States for both U.S. Residents and green card holders, whether they live in the United States or abroad. Taxable income for U.S. Citizens and green card holders is based on worldwide income.
What is a resident alien?
A resident alien is someone who is not a U.S. Citizen and is either a lawful permanent resident of the U.S. (green card test), or physically present in the U.S. for significant periods of time (substantial presence test). In fact, a resident alien is also subject to U.S. filing requirements and taxation.
What if a green card holder is married to a U.S. citizen?
Foreign income is taxable whether or not the green card holder is married to a U.S. Citizen.
Taxpayers must file a U.S. Tax return, even if various tax benefits (see tax benefits below) eliminate a taxpayer’s U.S. Tax liability. And, in order to claim the tax benefits below, the returns must be filed with the IRS.
Federal law requires U.S. Citizens and resident aliens to report any worldwide income, including income from foreign sources, such as:
- Bank and securities accounts
- Trusts and estates
- Pensions and retirement funds
In most cases, affected taxpayers need to fill out and attach IRS Schedule B to their tax return. Many tax filers will also need to file IRS form 8938, Statement of Specified Foreign Financial Assets, and FINCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).
There are two primary tax benefits for people who have foreign income:
- The foreign earned income exclusion (up to $102,100 for 2017), for U.S. Citizens and resident aliens who live and work abroad and have earned income, and
- The foreign tax credit, for taxpayers who pay income taxes to foreign governments. Eligible taxpayers can only take advantage of these two benefits by filing a federal income tax return with the IRS.
U.S. Citizens and green card holders with foreign income, who reside in the United States, can also take advantage of the foreign tax credit, if they paid foreign income tax on their foreign earnings during the year (for example, if a foreign government withheld taxes on a foreign pension distribution).
There are numerous other tax considerations to factor in when living abroad or having foreign sourced income, including the foreign housing exclusion/deduction and various tax treaties that the U.S. Government has with many foreign governments. If you have questions about foreign income or are considering working or investing abroad, please contact us.