In today’s global economy, it is very common for people to have income from sources outside the United States. The income can be a foreign salary, rental income from properties that are present outside the U.S., or dividends from international investment.
These global incomes can make filing taxes difficult for a U.S. taxpayer. In U.S. tax law, it is important for citizens to report their worldwide income when they file tax returns, irrespective of where they have earned the money.
If you are having trouble filing taxes for your international income, then consult with a professional CPA in North Dallas, Texas. They can help you understand all the complex laws and help you stay compliant with your tax obligations.
Read this article to learn more about international income so that you can understand the basics and make a better financial decision based on it.
What is Global Income, and How Does It Affect U.S. Taxpayers?
Global income basically means any income that you have earned outside the United States. U.S. citizens and residents need to report all of their global income even if they have already paid the tax in a foreign country.
It is important to know what income can be called global income and its impact on U.S. taxes so that you can stay compliant and avoid any unnecessary fines. Many people think that foreign income is not taxed by the U.S. government, but this is a misconception that can cause compliance issues.
What Qualifies as Global Income
Global income includes wages that are earned abroad, income from properties that are on rent, dividends from your foreign investments, and royalties from international intellectual property. Even if the income is small, it is important to report it.
How U.S. Taxes Global Income
The U.S. uses a worldwide taxation system, which means all income, domestically or foreign, should be reported and taxed. Foreign tax credits or exclusions can lower the total tax burden, but reporting is still needed.
Strategies to Minimize Double Taxation
Taxpayers who have foreign income can face the issue of paying taxes twice for the same income in two countries, one at the source country and then in the U.S. To deal with this, the IRS gives you tools like the Foreign Tax Credit (FTC) and the Foreign Earned Income Exclusion (FEIE).
It requires proper eligibility and planning to use these tools effectively. Again, though these provisions can reduce tax burdens considerably if applied incorrectly, they may result in compliance issues or foregone savings.
Foreign Tax Credit (FTC)
FTC basically allows taxpayers to decrease U.S. taxes by paying taxes that they have already paid in any foreign country. If a US taxpayer has already paid $15,000 in foreign taxes, then they can claim credits up to that amount, which reduces the U.S. liability. These credits can not be more than U.S. tax liability on the same income.
Foreign Earned Income Exclusion (FEIE)
Taxpayers also need to meet the Bona Fide Residence Test (Showing that you live in a different country) or the Physical Presence Test (330 days abroad in a 12-month period).
This basically excludes a portion of income that has been earned (up to $120,000+ annually) from U.S. taxes. FEIE applies only to income that has been earned and does not include passive income like dividends.
Taxpayers can sometimes use both the FTC and FEIE to optimize their tax outcome, but this needs careful planning to avoid any problems.
Reporting Foreign Assets and Accounts
It is your legal obligation to properly report your foreign assets and accounts. If you do not comply with this, then you can pay heavy fines and face legal issues. Tax reporting obligations such as the FBAR and FATCA help in transparency but burden those who earn or hold a global income.
For taxpayers to remain compliant, they need to understand the thresholds of the reporting requirement, the forms that will apply in the process, and the timelines involved. They also need to work with a tax professional to make sure that they get the reporting right and avoid any costly mistakes.
Protect Your Global Wealth
Dealing with complex international taxation can be hard. Consult with a CPA who can help you optimize your tax strategy, minimize your tax liability, and make sure that you are compliant with U.S. and foreign tax laws.