Reporting Worldwide Income & Assets
Reporting worldwide income & assets on your US tax return does not always mean that you will pay more taxes. Below the 3 easy steps to identify the foreign tax credits & exemptions that might be available to you to offset your international tax burden.
Step #1 – Determine whether you are a US tax resident
The first step is to determine whether you are required to report your worldwide activity.
1. US tax system: citizenship based
There are 2 main taxation systems in the world: (1) a territorial system - where only income generated inside the country is taxed and (2) a residence-based system - where residents of the country are taxed on their worldwide.
The US does not follow any of these 2 systems (!) - and instead applies a citizenship based system – where both US based resident and non-US based citizens are taxed on their worldwide income. What this means is: if you hold a US passport of a permanent resident visa (green card) you are subject to the US taxation rules wherever you live in the world.
2. Dual Status Resident
In some situations, you might be considered a “dual status resident”. This usually occurs the year of your arrival in the US or the year of your departure from the US. As a dual resident, you will be taxed on US source income for the period you are considered a non-US tax resident and you will be taxed on your worldwide income for the period you are considered a US tax resident.
You can elect to be treated as a US tax resident for the full year if: (1) you are a non resident at the beginning of the year and a US resident at the end of the year or (2) you are married to a U.S. citizen or a US resident alien at the end of the year.
3. US citizens living aboard
If you were born from US parents, or if you were born in the US and moved out of the country at a young age or if you are US citizen employed outside the US, you have the same tax filing requirement as a US citizen living in the US.
4. Undocumented (Illegal) Resident
Even if you do not have a proper immigration status on US territory, you are required to file US income tax returns and report the income in the same manner as a US citizens or a legal resident. Since you are ineligible for a US social security number (SSN), you must apply for an Individual taxpayer identification number (ITIN) for tax filing purpose.
To apply for an ITIN & file your taxes: https://www.kbfinancials.biz/itin---ein-services.html
Step #2 – Identify the foreign income / assets to report
1. Reporting worldwide income
You must report income from all sources within and outside of the U.S on your US tax return. This is true whether or not you receive a form W-2 (for wages) or a form 1099 (for miscellaneous income) or the foreign equivalents. Your foreign income will be subject to the same tax rates as your US income: the US administration applies the same marginal tax rates for both foreign and U.S.-source income and for both US based and overseas based US citizens.
To view the US tax rates: https://www.kbfinancials.biz/tax-rates.html
2. Report your worldwide assets
If you have a financial interest (ownership or signature) over a financial asset (bank account, investment portfolio etc) and the combined balance of those account exceeds $10, 000 anytime during the year, you must report the assets yearly in the US.
More information on reporting foreign assets: https://www.kbfinancials.biz/report-your-foreign-assets.html
Step #3 – Claim the foreign tax credits & exemptions
1. Foreign earned Income exclusion ($103,900 in 2018)
You may be able to exclude part of your foreign earned income from your US tax. To qualify for the exclusion, you must have (1) foreign income, (2) be a US citizen or resident alien who resided in the foreign country for a least one full tax year (bona fide resident test) or be physically present in a foreign country for at least 330 days during any consecutive 12 month period (physical presence test) and (3) have a tax home in a foreign country (with no abode in the US).
2. Foreign tax credit
You may be entitled to a foreign tax credit if you paid income tax to a foreign country. The tax credit is limited: a prorata is calculated by comparing the portion of your income that is from the foreign source vs your total worldwide income. Any unused foreign tax credit is carried back one year or forward 10 years.
3. Tax treaty exemptions
You may be entitled to a reduced tax rate or even an exemption from US tax, if a tax treaty allows for it. The United States has signed treaties with more than 90 countries. Tax treaties exist between countries (1) to prevent double taxation (2) to provide for reduced tax rates (for example on dividends & interest) and (3) to provide for "tie breaker" clauses for resolving conflicts between residency rules.
To view the list of tax treaties with the US: https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z
As always, the views contained in this article are not tax or legal advice and are not a substitute for consulting with a professional. Contact Karine Bauer EA at Kbauer Financials LLC for advice on your specific tax situation. Karine Bauer, EA is an Enrolled Agent licensed by the Treasury Department with unlimited rights to represent taxpayers before the Internal Revenue Service. She is an experienced tax professional with more than 20 years of international experience.
Updated on October 6th, 2018