U.S. TAXES ON FOREIGN INCOME
U.S. citizens and residents are subject to U.S. income taxation on their worldwide income, including income from foreign countries. Generally, that means you’re subject to U.S. taxes on foreign income. However, you may be able to claim a credit for the income taxes you’ve paid to the foreign country on your foreign income. Also, if you’re a resident of a foreign country, you may qualify to exclude your foreign earnings if you meet certain requirements. Finally, you may be able to exclude certain foreign income under the provisions of a tax treaty.
U.S. Taxes on Foreign Income: Foreign Tax Credits
If you paid foreign income taxes to a foreign country and are subject to U.S. tax on the same income, you may be able to take a credit for those taxes on your U.S. tax return. As a result, the foreign taxes reduce or may even completely offset your U.S. taxes on the foreign income. Instead of claiming a credit for the foreign taxes, you may chose to take a deduction on Schedule A of Form 1040 (‘itemized deduction’). However, claiming a credit is almost always more beneficial as it reduces your tax, instead of reducing the amount that’s subject to tax. You can claim a credit for foreign taxes by filing Form 1116 with your Form 1040.
U.S. Taxes on Foreign Income: Foreign Earned Income Exclusion
If you meet certain requirements, you may qualify for the foreign earned income exclusion. The main requirement is that you’re either a bona fide resident of a foreign country, or you were physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. If you meet the requirements, you can exclude your foreign ‘earned income’ (wages and self-employment income) up to $107,600 (2020) by filing Form 2555 with your Form 1040. If you’re using the foreign earned income exclusion, you generally can’t also claim a credit for the taxes on the income you’re excluding.
U.S. Taxes on Foreign Income: Tax Treaties
The United States has income tax treaties with a number of foreign countries. Under these treaties, certain income may be taxed at a reduced rate or exempt from U.S. income taxation. For example, certain tax treaties exclude payments made under the provisions of a foreign social security system. Therefore, there are no additional U.S. taxes on these foreign payments. If you’re excluding income based on the provisions of a tax treaty, you’re generally required to file Form 8833 with your Form 1040.
Sanders US Tax Services specializes in preparing U.S. tax returns with foreign income and foreign assets. We have offices in Denver, Colorado, as well as Germany, the Netherlands and Switzerland. Contact us with any questions you may have about U.S. taxes on foreign income and reporting foreign income or foreign assets on your U.S. tax return.