If you’re a U.S. citizen or resident alien you must pay taxes on any foreign income, regardless of whether you live in the United States or not.

You must report foreign income, even if it was earned in several different countries. If the foreign country that you earned the income in collected taxes, you may be eligible for a tax benefit from the U.S. however there is a limit of exclusion. Reporting requirements for foreign income are complex and include significant penalties for non-compliance. Consult with a tax professional regarding compliance issues.

Foreign Tax Relief

While it can be inconvenient to report foreign income and international tax, there are a variety of exclusions, deductions, and credits that can dramatically decrease your foreign earned income tax.

Foreign money

Foreign Income Exclusion

If you meet certain eligibility requirements, you may be able to exclude some of your foreign earned income from your tax return. You may also be able to exclude some reimbursed housing costs.

Tax Credit

Foreign Tax Credit

You may be eligible to receive a credit to your US taxes for the taxes that you paid to qualifying foreign governments. This credit can be used along with the Foreign Income Exclusion but not the Foreign Tax Deduction.

Foreign Tax Deduction

The Foreign Tax Deduction allows Americans to reduce their taxable income by a portion of the amount of income tax paid to foreign countries. The Foreign Tax Deduction is typically more advantageous for a taxpayer.

Foreign Account Reporting Procedures

Streamlined Domestic Offshore Procedures (SDOP)

*severe penalties for non-compliance

The streamlined domestic offshore procedures (SDOP) is a program offered by the IRS and is available to individuals and entities who have unreported income from undisclosed foreign assets. 

Qualified filers must file amended returns for the last three years as well as file a delinquent or amended Report of Foreign Bank Account (FBAR) for the past six years. They must also submit a signed statement attesting that the failure to report foreign income resulted from non-willful conduct.

Taxpayers who fail to file are subject to penalty of $10,000 and a one-time penalty equal to half of taxpayers assets.

Streamlined Foreign Offshore Procedures (SFOP)

The streamlined foreign offshore procedures (SFOP) is a program offered by the IRS to report foreign income and is available to United States taxpayers who meet the Foreign Residence requirement. You must be a U.S. citizen or legal permanent resident and you must have lived outside of the U.S. in one of the last three years for at least 330 days.

Qualified filers are still required to amend your U.S. tax returns for the last three years and report your foreign account information for the last six years. 

Foreign Bank & Financial Accounts Report (FBAR)

U.S. taxpayers with a financial interest or authority over foreign financial accounts whose aggregate value exceed $10,000 generally must file an FBAR. In many cases, filing an FBAR with the IRS to report your foreign assets is the only step needed to be in compliance with Foreign Account Tax Compliance Act (FATCA) and can will most likely result in zero taxes owed for accounts that do not produce income.

Failure to file an FBAR while the account balance is properly reported will result in no penalties. However, willful failure to file may result in penalties of up to $100,000 or 50% of the account balance per year. Criminal penalties may be imposed as well.

US Tax Treaties

It’s crucial that you consult with a tax professional to know what taxing authorities your income is subjected to.

What is a US Tax Treaty?

The United States has tax treaties with several foreign countries whereby residents of those foreign countries are taxed at a different rate or are exempt all together from US taxes on certain income that they receive within the US. These rates, exemptions, & items of income vary significantly among countries.

How can a US Tax Treaty impact me?

In addition to being subjected to different tax rates on income earned in the US, these same treaties allow US residents or citizens to be taxed at reduced rates or are exempt from the foreign taxes on certain items of income they receive within foreign countries. A Saving Clause is included in most tax treaties to inhibit US citizens from avoiding taxation on income they earn in the US.

Do all states in the US honor US Tax Treaties?

The answer to this question is no. Many individual states within the Unites States will tax income that is earned or sourced in their state and many do not honor the provisions of tax treaties. Furthermore, if no treaty exists between the US and your country then you are taxed on the income in the same way shown in the instruction for the applicable US tax return.

For a complete list of countries who have entered into a Tax Treaty with the United States, visit the Treasury Department website.

ITIN Certification

An Individual Taxpayer Identification Number (ITIN) is a tax processing number that the IRS issues to individuals who are required to have a US taxpayer number but who are not eligible for a Social Security Number (SSN). An ITIN allows individuals to set up an account by which they can pay their taxes or receive a tax refund and they are required regardless of immigration status.

An ITIN is used for federal tax reporting purposes only, it does not authorize you to work in the US, provide Social Security benefit eligibility, nor does it qualify a dependent for the Earned Income Tax Credit.

If you fall in any of the below categories then you are required to have an ITIN:

  • You do not have and are not eligible for a Social Security Number
  • You are required to provide a federal tax identification number or file a federal tax return and you are a:
  • Nonresident alien who is required to file a US tax return
  • US resident alien who is filing a US tax return
  • Dependent or spouse of a US citizen or resident alient
  • Dependent or spouse of a nonresident alien visa holder
  • Nonresident alien claiming a tax treaty benefit
  • Nonresident alien student, professor, or researcher filing a US tax return or claiming an exemption

Certain ITIN’s are set to expire soon. If you hold an ITIN that was issued before 2013 or if you have an ITIN that has not been used on a federal tax return at least once in the last three years then your ITIN will expire on December 31, 2021. You may renew your ITIN by filing a form W7 with the IRS however the only way to renew an ITIN for a dependent or spouse is by filing a tax return that includes a form W7 and appropriate documentation attached. 

For more information about Individual Taxpayer Identification Numbers, please visit the IRS website.

We’re Foreign Tax Compliance Experts

The tax experts at Jay Finn, CPA have over 37 years of experience helping clients remain compliant with complex foreign income reporting laws. Give us a call and we’ll help you avoid expensive mistakes.

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