CARL WATTS & ASSOCIATES

September 17, 2018

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Foreign Income & Reporting
Requirements

If you are filing a joint return, it is the value of your specified foreign asset that is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

You must report interest and/or dividends earned on a foreign bank account as part of your worldwide income. This applies even if you had less than $1,500 or more of total interest and/or dividends for the year.

Convert the foreign currency into U.S. dollars at the current exchange rate when you receive the income. If there's more than one exchange rate, use the rate that most properly reflects the income.

Depending on your circumstances, you may have to pay taxes both to the government where the company from which you earned your income is located and to the IRS. However, in some cases you may receive tax credits or tax exclusions for some or all of your foreign income.

If you are taxed by the country from which your income is earned and that country has established a tax treaty with the U.S., you may be able to claim the Foreign Income Tax Credit. This credit was designed to help you avoid double taxation and allows you to claim a credit for income tax that you have paid to a foreign government. The intended net result of the tax credit is to ensure that the total income tax that you pay is no more than the highest result that you would have paid to a single government.


The tax must meet four tests to qualify for the credit: (1) it must be a legal and actual foreign tax liability; (2) the tax must be imposed on you; (3) you must have paid or accrued the tax, and (4) it must be an income tax (or a tax in lieu of an income tax).

You can choose to take the amount of any qualified foreign taxes paid during the year as a foreign tax credit or as an itemized deduction. To choose the deduction, you must itemize deductions on Schedule A. To choose the foreign tax credit you generally must complete Form 1116, Foreign Tax Credit.

You must not confuse the Foreign Income Tax Credit with the Foreign Earned Income Exclusion.

The Foreign Earned Income Exclusion is designed to allow American citizens and legal residents who reside outside the country to exclude most or all of the income earned from foreign sources from their federal income tax liability.

For tax year 2018, the foreign earned income exclusion is $104,100, up from $102,100 for tax year 2017.

The IRS has established strict guidelines for taxpayers who wish to claim the Foreign Earned Income Exclusion for a given tax year. Taxpayers must meet all the guidelines listed below to qualify for the exclusion.

Must have foreign earned income;

Must have established a tax home in a foreign country;

Must pass either the bona fide residence test or the physical presence test.

The bona fide residence test requires that you are a bona fide resident in a foreign country for a period that includes at least a full tax year. The physical presence test requires you to be physically present in that foreign country for at least 330 days during a single 12-month period. You need not be present for 330 consecutive days, however.

Any taxes owed for the remaining income will be paid at the tax rates that would have applied without having claimed the exclusion.

If you claim the exclusion, you will not be able to claim a deduction or credit on your U.S. income tax return for the foreign income tax on your earned income.

In addition to the foreign earned income exclusion, you can also claim an exclusion or a deduction from gross income for your housing amount if your tax home is in a foreign country and you qualify for the exclusions and deduction under either the bona fide residence test or the physical presence test.


The housing exclusion applies only to amounts considered paid for with employer-provided amounts, which includes any amounts paid to you or paid or incurred on your behalf by your employer that are taxable foreign earned income to you for the year (without regard to the foreign earned income exclusion). The housing deduction applies only to amounts paid for with self-employment earnings.

Also, for purposes of determining the foreign housing exclusion or deduction, your housing expenses eligible to be considered in calculating the housing cost amount may not
exceed a certain limit. The limit on housing expenses is generally 30% of the maximum foreign earned income exclusion, but it may vary depending upon the location in which you incur housing expenses.

A qualifying individual may claim the foreign earned income exclusion on foreign earned self-employment income. The excluded amount will reduce the individual’s regular income tax, but will not reduce the individual’s self-employment tax. Also, the foreign housing deduction instead of a foreign housing exclusion may be claimed.

You generally cannot get an extension of time to file of more than 6 months. However, if you are outside the United States and meet certain tests, you may be able to get a longer extension.

Contributions to your individual retirement accounts (IRAs) that are Traditional IRAs or Roth IRAs are generally limited to a certain annual dollar amount ($5,500 for 2018 and $6,000 for 2019) or your compensation that is includible in your gross income for the tax year.

If you exclude income under the foreign earned income exclusion or the foreign housing exclusion, you must add back the excluded amounts in determining your compensation for purposes of the IRA limits. Likewise, for purposes of determining the IRA limits, do not reduce your compensation by any foreign housing deductions.

It is important to mention that you will face serious consequences if the IRS finds you have unreported income or undisclosed foreign financial accounts. These consequences may include, but are not limited to, additional taxes, substantial penalties, interest, fines, and even imprisonment.

All the information above is just a summary of the complicated and ever growing number of rules and exceptions to the rules that accompany all codes of the federal tax laws, not just the foreign income. To make sure you take advantage of every tax deduction, credit, or exclusion you are entitled to, please get help from a tax professional.
If you are a U.S. citizen or resident alien living or traveling outside the United States, you generally are required to file income tax returns, estate tax returns, and gift tax returns and pay estimated tax in the same way as those residing in the United States.


Your worldwide income is subject to U.S. income tax, regardless of where you reside. Your income, filing status, and age generally determine whether you must file a return. For 2018, for instance, the threshold required for a single taxpayer is $10,400, and the amount increases to $11,950 at age 65.

Let’s clarify the meaning of some of the most significant terms used when we refer to income, foreign income and taxes. In an effort to cover all different kinds of foreign income, the IRS has come up with the following classification.

Earned Income
 Unearned Income Variable Income

Salaries & Wages
Dividends
Business profits

Commissions
Interest
Royalties

Bonuses
Captial Gains
Rents

Professional Fees
Gambling winnings
Scholarships and fellowships

Tips
Alimony

Social Security beneftis

Pensions

Annuities

In addition to the types of earned income listed, certain noncash income and allowances or reimbursements are considered earned income too. The fair market value of property or facilities provided to you by your employer in the form of lodging, meals, or use of a car is earned income.

Some types of income are not easily identified as earned or unearned income, hence the third category of variable income. A good example would be the rental income which is generally considered unearned income. If you perform personal services in connection with the production of rent, up to 30% of your net rental income can be considered earned income.

The source of your earned income is the place where you perform the services for which you received the income.


Foreign earned income is income you receive for performing personal services in a foreign country.

Where or how you are paid has no effect on the source of the income. For example, income you receive for work done in France is income from a foreign source even if the income is paid directly to your bank account in the United States and your employer is located in New York City.

The requirement to report foreign income applies even if you do not receive a W2 Form, Form 1099 or equivalent forms from the foreign income source. It is your responsibility to provide an accurate calculation of your income by calculating payments from pay stubs, wire transfer records, dividend reports, bank statements or PayPal monthly statements.

Once you calculate your foreign income, you must combine it with any domestic income you have earned in order to calculate the adjusted gross income to be included on your federal income tax return.

Generally, you report your foreign income where you normally report your U.S. income on your tax return.

Earned income is reported on Form 1040; interest and dividend income is reported on Schedule B; income from rental properties is reported on Schedule E, etc. Self- employed workers who earn income from foreign clients must also report their foreign earnings on their federal income tax returns.

You must report any foreign financial assets or accounts that meet certain thresholds. Generally, a report on foreign accounts is required if you hold in the aggregate more than $10,000.

Bellow are the types of financial accounts to be reported on your U.S. tax return.

“Account” is broadly defined to include any foreign bank, securities, or other financial accounts.

“Bank accounts” include savings deposits, demand deposits, checking accounts, and any other accounts maintained with a person engaged in the business of banking.

“Securities accounts” include accounts maintained with a person in the business of buying, selling, holding, or trading stock or other securities.

Form 8938, Statement of Specified Foreign Financial Assets is a relatively new form filed with your Form 1040 and is used to report specified foreign financial assets. The reporting threshold for FATCA depends on filing status and whether the taxpayer is living within the U.S. or abroad.


The reporting threshold for unmarried taxpayers living in the U.S is the total value of specified foreign financial assets that is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

For married taxpayers filing a joint income tax return and living in the U.S. the reporting threshold is the total value of specified foreign financial assets that is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.

The reporting threshold for taxpayers living abroad who are filing a return other than a joint return is the total value of your specified foreign assets that is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year.
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