For many American’s though, figuring out their tax obligations quickly becomes complicated and confusing. How much do I owe on foreign income? Is it taxed the same as income at home? Do I have to pay taxes to two countries?
Use this introductory guide to figure out when you need to pay U.S. taxes on foreign income.
Basic IRS Policy
The short answer to this questions is yes, you definitely have to pay taxes on foreign income. The U.S. government holds all its citizens to account for their earnings no matter where they are earned.
As a U.S. citizen, you must file a tax return every year you earn more than $10,350 if filing alone or $20,700 if married filing jointly. There are stiff penalties in place for anyone who attempts to hide income of any kind. These are especially important when dealing with overseas income.
While many foreign employers don’t report income to other countries, the IRS has many ways to track down income. You will face severe consequences for attempting to hide foreign earnings or investments.
Filing Your Taxes
One of the benefits of working overseas is an automatic two-month extension to the tax deadline. Unfortunately, this is granted due to the potential complexity of filing foreign and U.S. taxes.
If you have established a tax home in a foreign country you may qualify for the Foreign Earned Income Exclusion. This allows you to deduct the first $104,100 from your U.S. tax obligation.
The purpose of this is to prevent you from paying U.S. income taxes on top of a foreign income tax
You may also qualify for the foreign housing exclusion or deduction. This allows you to deduct a portion of your housing expenses from your gross income.
Calculating Your U.S. Taxes on Foreign Income
One of the biggest issues many expats have is just how much they owe on their income. Dealing with a foreign currency only makes this more complicated.
The IRS allows you to convert your annual earnings to U.S. dollars using either an annual average or an itemized listing of the exchange rate at each pay or transaction date.
All income throughout the world must be listed on your return. You must also add any interest on foreign bank accounts and growth in foreign stocks and investments.
If you own a rental property abroad you have to add this income to your calculations as well.
Don’t Freak Out
Paying U.S. taxes on foreign income can make already complicated U.S. tax requirements seem overwhelming. The thing to remember is that so long as you’re honest, hide nothing and double check your work you have nothing to fear from the IRS.
If you would like to learn more about running a business and working abroad, check out these useful articles.