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60. Overview of U.S. taxes on foreign income for individuals

https://tax.thomsonreuters.com/blog/overview-of-u-s-taxes-on-foreign-income-for-individuals/

For U.S. citizens living abroad or earning income from foreign sources, questions often arise on how the U.S. tax system applies to them and how they can ensure compliance while minimizing tax liability. From understanding what foreign income is to navigating various tax forms and deductions, it is important for accountants to understand the ins and outs of U.S. tax on foreign income in order to help their clients ensure compliance and avoid penalties.

To support this effort, forward-thinking accounting firms are increasingly using tax preparation software and scan-and-populate solutions to tackle the challenges of foreign income reporting. With federal, state, and local tax programs that cut tax workflow time and increase productivity, accountants can automate the tax prep process and create a seamless client experience. Let’s take a look at the basics of foreign income reporting and discuss how technology can ensure compliance and minimize tax liability.

What is foreign earned income?

Foreign earned income is defined as income earned through labor or services while living and working in a foreign country. This category typically includes salaries, wages, bonuses, and self-employment income received from foreign employment or business activities. It’s crucial to distinguish foreign earned income from other types of foreign income, as the Foreign Earned Income Exclusion (FEIE), a valuable U.S. tax benefit, specifically applies to this category. Investment income, rental income, and passive income from foreign sources do not qualify for the FEIE. These types of income may be subject to different tax treatment.

What is FEIE?

The Foreign Earned Income Exclusion (FEIE) is a significant tax benefit provided by the IRS to U.S. citizens and residents who meet certain criteria. The FEIE allows eligible taxpayers to exclude a portion of their foreign earned income from U.S. taxation, potentially resulting in a reduced or zero U.S. tax liability on that income. U.S. citizens and residents are generally required to report their worldwide income to the IRS. However, the U.S. tax system recognizes that U.S. individuals living abroad may face unique challenges and expenses. The FEIE is in place to alleviate some of the tax burden on expatriates. To claim the FEIE, you must have foreign earned income, your tax home must be in a foreign country, and you must be one of the following:

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