If you are a U.S. citizen or a resident alien, your income, including any foreign income or money generated outside of the United States, is liable to U.S. income tax. When you earn this money, it makes no difference whether you live within or outside of the United States. Furthermore, even if you do not get a Form W-2, Wage and Tax Statement, or Form 1099 from the overseas payer, you must declare this income.
- Your income is liable to US income tax whether you are a US citizen or a resident alien.
- In some situations, particularly those relating to the duration and type of your stay in a foreign nation, you may be able to deduct some of your overseas earned income from your federal income tax return in the United States.
- The government provides the overseas tax credit to decrease the tax burden of certain taxpayers.
- When you submit your taxes, you record your earned income on line 7 of IRS Form 1040.
- The IRS considers wages, bonuses, salaries, commissions, gratuities, and net profits from self-employment to be kinds of earned income.
U.S. Citizen vs. U.S. Resident Alien
If you are not a citizen of the United States, the IRS will classify you as a resident alien or a nonresident alien. For tax purposes, you are a resident alien of the United States if you fulfill either the green card test or the significant presence criteria for the calendar year.
IRS Publication 519, U.S. Tax Guide for Aliens, explains the requirements for being deemed a U.S. resident alien for tax purposes. Both US citizens and US resident aliens are expected to submit all of their income to the US government in order for it to be taxed properly.
Total Income Includes Both Earned and Unearned Income
The amount taxed includes both earned and unearned income from international and non-foreign sources. Wages, salaries, bonuses, commissions, gratuities, and net profits from self-employment are all considered earned income by the IRS.
Unearned income, according to the IRS, is income from investments and other sources unrelated to work. Unearned income includes savings account interest, bond interest, alimony, and stock dividends.
If you are a US citizen or a US resident alien, you record your overseas income on your tax return in the same place that you disclose your US income. Earned income is reported on line 7 of IRS Form 1040; interest and dividend income is recorded on Schedule B; rental income is reported on Schedule E, and so on, depending on the kind of income reported.
There are other restrictions that may influence your ability to claim the foreign-earned income exclusion. IRS Publication 54 contains more detailed information on taxpayer eligibility.
Foreign Earned Income Exclusion
You may be able to exclude part of your overseas earned income from your tax return provided you fulfill certain standards linked to the duration and type of your stay in a foreign nation. You may be able to deduct up to $108,700 of your foreign-earned income from your US income taxes for the tax year 2021. This threshold will rise to $112,000 in tax year 2022. The Foreign Earned Income Exclusion is the name given to this section of the tax law.
You must fulfill the following three conditions to be eligible for the foreign-earned income exclusion:
- Your tax residence must be in another nation. Your tax home is defined as the approximate vicinity of your principal place of employment—where you are continuously or indefinitely engaged to work as an employee or self-employed individual—regardless of where you keep your family home. It is crucial to understand that your place of residence may vary from your tax residence. You must have earned revenue from abroad. You must either be: A US citizen who is a legitimate resident of another nation for the complete tax year.
- A U.S. resident alien who is a citizen or national of a country with whom the United States has an income tax treaty and who is a bona fide resident of that country for the whole tax year.
- A U.S. citizen or resident alien who is physically present in a foreign nation or countries for at least 330 full days in any 12-month period.
Foreign Tax Credit
Although it depends on the nation in which you earned the money, it is probable that your foreign source income will be taxed in two countries: the United States and the country in which it was obtained. To compensate, the United States government provides a tax break known as the Foreign Tax Credit, which reduces the tax burden of certain individuals.
This is a non-refundable tax credit for income taxes paid to a foreign government as a result of withholdings. Anyone who works in a foreign nation or has investment income from a foreign source is eligible for the foreign tax credit.
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