Taxes on Foreign Income -- You Owe It

Ever wonder if people have to pay taxes earned on foreign income (money earned in another country) or what the rules are regarding it? Well, never fear, you've come to the right place for answers. (And if you're not interested, you can simply ignore this article and another will come up in a couple of hours.) ;-)

Here's a piece from Yahoo that discusses taxes on foreign income. The bottom line: you need to pay income taxes on foreign income earned (though you may get a credit from the US government if you paid taxes in the country where the income was earned.) The highlights:

If you're a U.S. citizen or resident for tax purposes, you have to file and pay taxes in the U.S. on your worldwide income. Worldwide income means income earned from anywhere.

Tax credits for foreign taxes paid are allowed against your U.S. taxes to prevent double taxation. The credit only applies to taxes on foreign source income.

Every once in awhile I get a form from a mutual fund company saying I have income from a foreign source. I take it and give it to my CPA, who handles all my tax issues. But for those tax do-it-yourselfers out there, be sure you include your worldwide income on your tax returns.

Comments

[plonkee]

Also if you have earned foreign income, I'm pretty sure there is a pretty high deductible on it (like about $70,000).

[Chris]

Isn't all our money subject to double taxation anyway? I'm taxed when I earn it, I'm taxed when I spend it, I'm taxed when I save it.

[F. Morana]

The vehicle for determining taxation on foreign income is IRS Form 1116 (and AMT 1116). If the country in which the foreign income was earned has a tax treaty in force with the U.S., then a portion of the taxes paid to that country may be credited against U.S. federal taxes -- but only proportionately, to the extent that the foreign source income is a proportion of total worldwide income. The uncreditable portion of foreign taxes paid, however, may be carried-over and credited in subsequent years, for up to a maximum of ten years. After that, you would have to lodge a special claim, with the possibility of an appearance in U.S. tax court. There are many other rules and regulations regarding foreign tax credits, and it can become frustrating for U.S. taxpayers to attempt to obtain the credits allowed under the treaties. But for those who have have a high proportion of foreign income, these credits can be decisive, and must be vigorously pursued.

[plonkee]

Also, I forgot to highlight if you are a US citizen living overseas you still have to file tax returns and pay tax on all your income regardless of your residency.

[Tim]

foreign earned income exclusion is $82,400...just double check your qualifications for the exclusion.

[Truth]

Wow.. Bush makes sure he gets his no matter what!!

[Cato]

"Wow.. Bush makes sure he gets his no matter what!!"

This has got to be the stupidest and most blindly partisan comment I've seen in ages.
The IRS is the result of BOTH political parties screwing us through the years. And there wouldn't even be a Foreign Income Tax exclusion at all, let alone $82,400, if the Democrats had their way. The Dems have been trying to eliminate this deduction for years.

Hey, You want tax fairness? Bring on the flat tax and put a fat leash on government spending.

[Big Cheese]

Plonkee,

Actually it's worse than that. To get to apply for the credit of $82,500 you have to be physically out of the US for 330 days in a rolling 365 day year. Also say you make $250k, the $82.5k only applies to your income in the LOWEST tax bracket, you don't get to deduct this off your top tax bracket.

Now the worst point- if you take the $82,500 income deduction then you cannot deduct the taxes you paid on that income in a foreign country. I live in Thailand where the top tax rate is 37% (higher than the US federal tax of 35%) and kicks in at a lower level (about $85K I think)- I cannot qualify for the income deduction as I'd end up paying more. Amazingly I have to write a big check to Uncle Sam after paying foreign taxes as there's a very complicated formula (much like AMT) that has to be calculated 2 ways and generally doesn't give full credit on foreign taxes paid. So it's like paying 35% effective tax rate overseas then paying another 6% to the US gov't because the foreign tax credit is not 100%!

Expatriate Americans are the most patriotic hapless citizens as we have to pay into the system without getting any benefits from living in the country. We do get the benefits of travelling to many places in the world without getting a visa in advance- that's a nice perk, honestly. But so does most of Europe and the developed world and they DON'T have to pay taxes on income made outside their country!

The other advantage of living abroad is that you don't have to pay state taxes, local taxes, social security and medicare / medicaid & unemployment. You don't get credit for these programs but generally I don't think people in my generation (35 years old) will get their money back with Social Security. I'd rather not contribute given the choice.

Lastly if you wish to give up your citizenship you still have to file a tax return for the next 5 years and pay the US Gov't tax on your worldwide income. I believe congress passed a law forcing people to pay an 'exit tax' on all assets, not just income! It's really stacked against expatriates because there is not a big enough voice for all the americans living abroad.

-Big C.

[Robert]

My wife and I live in the US, but she (a German with resident alien status) received income in Germany last year for a book contract and for several articles she wrote. She will pay German taxes on this income.

I understand we have to claim this as part of 'World Income' but it isn't clear to me how avoid the double taxation problem. Can anyone explain the steps we should take?