In 2009, global financial firm USB was accused of colluding with some of its customers in an effort to hide income-producing assets to evade U.S. income tax. However, there is not always intent to defraud the government when you misrepresent income or deductions on your income tax return. Sometimes honest mistakes happen.
It would be easy to assume that foreign-earned income already taxed in the source country would not be taxable in the United States. It would not be fair to tax it twice, right? While it may not sound fair, U.S. citizens and residents must report all worldwide income on their tax return, even if some (or all) of that income has already been taxed by the source country. However, the news is not all bad. There are tax treaties between the United States and many countries to help mitigate potential double taxation. For more information on reporting foreign income, see IRS Publication 54.
Reporting income earned and taxed in another country is similar to reporting income earned in a non-resident state. If you have non-resident income, you report all income to your resident state, and receive a tax credit for any income tax paid to a non-resident state. If the tax rates are higher in your resident state, you will probably owe additional state tax. However, if your resident state has a lower rate, you will probably not owe tax. On a non-resident return, you only report your income earned in that state. This is very similar to how you would apply a foreign income tax credit for tax paid to other countries to a U.S. tax liability.
In addition to foreign income tax credits to reduce your liability, some U.S. citizens who work and live abroad may qualify for the foreign-earned income exclusion of up to $95,100 in 2012. They also may either exclude or deduct certain foreign housing amounts from their U.S. return. Among other conditions, one of the two following requirements must be met:
- The taxpayer must be a citizen or resident of the United States who has been a bona fide resident of a foreign country for an entire taxable year, and/or
- The taxpayer must be a citizen or resident of the United States who is present in a foreign country during at least 330 full days during any period of 12 consecutive months.
To qualify for a bona fide residence, you must reside in a foreign country for an uninterrupted period that includes the entire tax year. Generally, your stay must be indefinite. You may leave for short trips—to the United States or elsewhere—for vacation or business, but you must have a clear intention of returning to your foreign residence or a new bona fide residence in another country. More often than not, working in another country on a particular construction job for a specified period of time will not establish a bona fide residence, even if you are there for an entire tax year. For detailed information on qualifying for a bona fide residence, visit the IRS website: http://www.irs.gov/businesses/small/international/article/0,,id=96960,00.html.
In addition to reporting worldwide income, you must also report whether you have any foreign bank or investment accounts on your U.S. tax return. The Bank Secrecy Act requires you file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, if you have an interest in or authority over one or more foreign accounts and the aggregate value of all foreign accounts exceeds $10,000 at any time during the calendar year by July 1. This reporting requirement is for any citizen or resident of the United States and any domestic legal entity, such as a partnership, corporation, estate or trust. For more information on foreign account reporting requirements, visit the IRS website: http://www.irs.gov/newsroom/article/0,,id=168194,00.html.
Foreign income tax reporting is complex. This article is only meant to provide an overview of some of the general reporting requirements in the United States. It has not touched on the tax laws of the foreign country in which you may reside or any of the complex tax situations that can arise when spending significant time outside the United States. If you would like additional information regarding this topic or any other tax related issue, contact Henssler Financial at 770-429-9166 or at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
