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 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.
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)
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.
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.
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.