Foreign Income Reporting

How to Report Foreign Income with IRS Form 1040

Taxpayers are required to annually submit a completed Form 1040 U.S. tax return if they are considered a U.S. person and have enough income to legally justify filing a tax return. These tax returns work to clearly and concisely disclose the persons’ foreign and domestic earnings to the IRS. America abides within what is called a worldwide income model, meaning if a U.S. person is either a U.S. Citizen, a Legal Permanent Resident, or a Foreign National who qualifies based on the substantial presence test, then they must file and submit a Form 1040 to disclose their global earnings and income.

Generally speaking, reporting foreign income can be confusing, and the IRS is a stickler for compliance. Be sure your reported income includes retirement income, any foreign investments, and your total earnings. Income gathered from a life insurance policy or mutual funds should also be disclosed. 

To ensure all foreign income is accounted for, consult a tax professional such as Dimov Tax & CPA Services! George Dimov and his expert team of CPAs are experts in foreign account disclosure and will help you avoid misfiling or under-reporting so that you do not face harsh consequences. If a taxpayer is found to be outside of proper compliance, they can consider tax amnesty, also known as voluntary disclosure. 

You will be taxed on your worldwide income when you file the required Form 1040, whether you are a US resident earning income outside of the country, or if you live abroad and earn income from any countries that are not the US. And, of course, you must report all earned income for the year on your standard US Tax Return. You may be eligible to apply for Foreign Tax Credit for any taxes previously paid on your foreign earnings, or you may be able to obtain a Foreign Earned Income Exclusion if you meet the Physical Presence or Bona-Fide Resident tests.

Defining a US Person

A U.S. person is clearly defined for the sake of worldwide income regulations. Simply, a U.S. individual could be 

• A U.S. Citizen

• A Legal Permanent Resident

• A Foreign National or other non-US person that meets the Substantial Presence Test

How is income listed on my return?

Schedule A: Medical costs, donations made to charity, interest on housing costs, and the year’s property tax are examples of applicable deductions taken within Schedule A. Foreign income deductions can be tricky, but are nonetheless permissible.

Schedule B: Interest and relevant dividends on foreign earnings are disclosed on the 1040 and within this schedule. Even if the total is less than $1,500, because the dividends and interest typically come from a foreign account, Schedule B is submitted for Part III.

Schedule C: This is relevant if you own a business outside of the US that is defined as a sole proprietorship.

Schedule D: Capital gain is disclosed here unless the gain comes from a fund. In that event, gains are detailed within Schedule B.

Schedule E: Page One of Schedule E is for listing rental earnings from any property that you own and lease out. Page Two is for the circumstance of foreign partnership/company membership. You will need to provide this information here, and you may need to provide this information on other forms such as Form 8621, 8865, or 5471.

Credit for Foreign Taxes Paid and Potential Exclusion of Foreign-Earned Income

In certain situations, the IRS will recognize taxes previously paid outside of the US and will issue a foreign tax credit. This credit is reported through IRS Form 1116. In the event that you paid less in taxes in the foreign nation than you would have in the US on the same amount of yearly earnings, you will then pay the difference on your standard U.S. return. If the same amount was paid, no additional taxes are due to the US, and if you paid more than you would have in the US, you are entitled to a foreign tax credit to be used against foreign earnings and income at a later date.

Anyone who lives overseas and earned income from overseas might get to avoid paying U.S. tax on part of those earnings. This is typically limited to earned income, but it could include housing in specific contexts. You will report this potential exclusion on Form 2555.

To see if you qualify for foreign-earned income exclusion, refer to these two tests: 

1. Physical Presence Test (were you present in a foreign country or countries for 330 full days during a period of 12 consecutive months?)

2. Bona-Fide Resident Test (did you live in a foreign country for an undisturbed period of time that included a complete tax year?)

If these tests apply to you, then despite your income being reported, it is also excluded from being taxed.

For advice on filing Form 1040, or to explore alternate forms and avenues for reporting foreign assets and income, consult Dimov Tax & CPA Services today! These professional CPAs can help you find the necessary forms and ensure they are filed before any deadlines are missed or penalties are issued. File smarter with Dimov Tax!