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Reporting Foreign Earned Income on Your US Tax Return

If you are a U.S. citizen or resident alien, you must report income from sources outside the United States (foreign income) on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form W­2, Wage and Tax Statement, or Form 1099 from the foreign payer. This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties). If you reside outside the United States, you may be able to exclude part or your entire foreign source earned income.

Tax on Foreign Income

If you are a US citizen or resident alien, you need to pay tax on foreign income. If you paid any tax on foreign income in your respective country you may get a tax benefit from the US government, but there is also a limit of exclusion for foreign income.

Reporting Your Foreign Income

If you are a U.S. citizen or resident during tax year, you likely have foreign income that you must report on your tax return. Here we help you to understand a few concepts affecting foreign income.

The main foreign income concepts (explained below) are:

  • General Rules Regarding Foreign Income
  • The Foreign Tax Credit
  • The Foreign Earned Income Exclusion
  • Reporting Foreign Financial Assets and Accounts

General Rules Regarding Foreign Income

1. What foreign income is taxable on my U.S. return? 

If you are a U.S. citizen or resident, you are required to report your worldwide income on your tax return. This means that you must not only report income you receive from U.S. sources, but you must also report income you receive from foreign sources.

2. Where do I report the foreign income on my return? 

Generally, you report your foreign income where you normally report your U.S. income on your tax return. Earned income (wages) is reported on line 7 of Form 1040; interest and dividend income is reported on Schedule B; income from rental properties is reported on Schedule E, etc.

The Foreign Tax Credit

Since it is likely your foreign source income will be taxed by both the U.S. and a foreign country, there is a Foreign Tax Credit. The foreign tax credit helps to ensure that you are only taxed once on the foreign source income, but at the higher of the foreign or U.S. income tax rates on that income.

The Foreign Earned Income Exclusion

If you meet certain tests related to the length and nature of your stay in a foreign country, you may qualify to exclude some of your foreign earned income from your tax return. You may also be able to exclude or deduct some of your reimbursed housing costs. You cannot exclude or deduct more than your foreign earned income for the year. For 2014, the maximum foreign earned income exclusion is $99,200.

Reporting Foreign Financial Assets and Accounts

There has been a requirement for many years to report foreign income, referred to as FBAR (foreign bank and financial accounts report). You must report any foreign financial assets or accounts that meet certain thresholds. Generally, a report on foreign accounts is required if you hold in the aggregate more than $10,000.

Reportable Financial Accounts

The following types of financial accounts are reportable, meaning you must report these on your U.S. tax return.

  • “Account” is broadly defined to include any foreign bank, securities, or other financial accounts.
  • “Bank accounts” include savings deposits, demand deposits, checking accounts, and any other accounts maintained with a person engaged in the business of banking.
  • “Securities accounts” include accounts maintained with a person in the business of buying, selling, holding, or trading stock or other securities.          
  • “Other financial accounts” include:
    • An account with a person that is in the business of accepting deposits as a financial agency;
    • An account that is an insurance policy with a cash value or an annuity policy;
    • An account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or
    • An account with a mutual fund or similar pooled fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions (does NOT include hedge funds).

Form 8938, Statement of Specified Foreign Financial Assets:

This is a relatively new form filed with your Form 1040 and is used to report specified foreign financial assets. The reporting threshold for FATCA depends on filing status and whether the taxpayer is living within the U.S. or abroad.

What are the Reporting Thresholds for Domestic Taxpayers?

Unmarried taxpayers living in the U.S.:  The total value of specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

Married taxpayers filing a joint income tax return and living in the U.S.:  The total value of specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.

What are the reporting thresholds for taxpayers living abroad?

You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year.

You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

How do I report interest I earned on a foreign bank account?

You must report interest earned on a foreign bank account as part of your worldwide income if you are one of these:

  • U.S. citizen
  • Resident alien

Report this interest with domestic interest income on Form 1040. You'll also file Schedule B if you had one of these for a financial account in a foreign country:

  • Interest in
  • Signature authority over

This applies even if you had less than $1,500 or more of total interest and/or dividends for the year. Convert the foreign currency into U.S. dollars at the current exchange rate when you receive the income. If there's more than one exchange rate, use the rate that most properly reflects the income.

The income might be taxable to both the United States and the foreign country. If so, you can claim a foreign tax credit on taxes paid to the other country.

Usually only U.S. citizens and resident aliens must include this income on their return. However, if you're identified as a U.S. person, you have to report foreign bank accounts to the IRS. This is true as long as both of these apply:

  • You have a financial interest in or signature authority over one or more accounts in a foreign country. This includes bank accounts and securities accounts.
  • The total value of all foreign financial accounts is more than $10,000 at any time in the year.

A U.S. person is any of these:

  • A citizen or resident of the United States
  • A person doing business in the United States on a regular and ongoing basis
  • A domestic corporation
  • A domestic estate or trust

If these tests apply to you, you meet the reporting conditions when you do both of these:

  • Check the appropriate FBAR-related federal return questions. The questions are found on:
    • Form 1040, Schedule B
    • Form 1041, Other Information
    • Form 1065, Schedule B
    • Form 1120, Schedule N
  • If the foreign financial account is worth more than $10,000 at any time in the year, you must report it. Do so by filing FinCEN 114: Report of Foreign Bank and Financial Accounts. Unlike the previous form TD F 90-22.1, you can’t mail the form. You must file it online. 

What are the consequences for Evading Taxes on Foreign Source income?

You will face serious consequences if the IRS finds you have unreported income or undisclosed foreign financial accounts. These consequences may include, but are not limited to, additional taxes, substantial penalties, interest, fines, and even imprisonment.

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Contributed By:
Sudhir Pai, CPA, FCA, EA, CGMA
Managing CPA at Sudhir Pai, CPA PLLC

Sudhir is a CPA specializing in Accounting, Financial advisory, Tax & Business Consulting Services with broad experience in all aspects of accounting, administation, tax compliance, audit, and financial management. With over 20 years of experience, he is a Chartered Accountant from India and a Certified Public Accountant in the USA. He also leads a firm of CPAs that proactively understand, identifies and find a suitable solution for the clients.

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