Living in a Foreign Country and U.S. Taxation

For U.S. citizens living in foreign countries, there is little or no relief in income-tax filing requirements. Often we are faced with new requirements and situations, and given wrong advice from fellow citizens.

The tax preparers and advisors at U.S. Tax International specialize in helping U.S. citizens living in foreign countries. We have provided answers to some frequently asked questions.

Now that I am living in a foreign country, do I need to file a U.S. income tax return?
Most U.S. citizens must file an annual income tax return on their worldwide income. As a general rule, if you would have to file a return if you lived United States, you will need to file one while living overseas. Where you live has no bearing on your filing requirements.

My only income is from a company located in a foreign country , and I pay taxes to this foreign country. Do I have to include this income on my U.S. tax return?
U.S. citizens must include all worldwide income on their tax returns. This income could qualify for the $107,600.00 Foreign Earned Income Exclusion for 2020, but the exclusion is not automatic. You must include the income on your tax return and then exclude it. If you do not meet the requirements for the exclusion, then the tax you paid to the foreign country could possibly be taken as a deduction or as the Foreign Tax Credit.

I live in a foreign country, mostly living in hotels in Banff, Canada and work for a U.S. company. Does this income qualify for the $107,600.00 Foreign Earned Income Exclusion?
If you meet the other requirements for the foreign earned income exclusion, the wages you receive from your U.S. employer can also be excluded. Your employer is still required to withhold Social Security and Medicare from your wages.

I have my own small business in a foreign country and work as a self-employed person. My business is not incorporated. Does this income qualify for the Foreign Earned Income Exclusion?
Yes, you qualify for the exclusion. However, applying the exclusion to self employment income can be trickier than applying it to wages or salary. Be advised that the exclusion is for federal income tax only. You will still be required to pay self-employment tax (Social Security and Medicare taxes) on your profits.

I receive dividends from foreign companies. Are the dividends “foreign earned income,” and do they qualify for the exclusion?
No. The Foreign Earned Income Exclusion does not apply to income such as interest, dividends, capital gains, pensions, annuities and gambling. The exclusion applies strictly to earned income – in other words, your wages, salaries, bonuses, commissions, fees and other compensation for services rendered. Note: If you own 10% or more of a foreign corporation, you are required to file with your individual income tax return, IRS form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations).

I receive interest from my foreign bank account. Do I have to report this interest on my U.S. income tax return?
Yes. U.S. citizens must include in their income, monies received worldwide. This includes interest and dividend income. In addition, if the aggregate value for your foreign accounts is greater that $10,000 at any time during the year, a Report of Foreign Bank and Financial Accounts must be submitted to the U.S. Treasury Department. In addition, if you have financiall assets greater than $50,000.00 at the end of the year or $75,000.00 at any time during the year, located outside of the United States, you may be required to file Form 8938.

I transferred money from the United States to a foreign country. Is there anything special that I need to do?
If a U.S. citizen has a financial interest in or signature authority over any financial accounts, including bank, securities or other types of financial accounts in a foreign country, and if the aggregate value of these accounts exceeds $10,000 at any time during the year, the accounts must be reported to the U.S. Treasury Department on the Report of Foreign Bank and Financial Accounts, or FBAR. If a U.S. citizen has finanial assets greater than $50,000.00 at the end of the year or $75,000.00 at any time during the year, the accounts may need to be reported on Form 8938.

Last year I got married to a foreign national citizen. Can I file a joint return with my spouse, who is not a U.S. citizen?
Yes, but if you do so your spouse’s income is now subject to U.S. taxes. If your spouse does not work, or has very little or no income, it could be to your advantage to file a joint return. Your spouse must obtain an Individual Taxpayer Identification Number, or ITIN, if they do not have one already.

My foreign national wife has a child from a previous marriage. The child is living with us. Can I claim the child as a dependent on my tax return?
To be claimed as a dependent, the dependent must be a citizen or resident of the United States, Canada, or Mexico, or in certain cases, a legally adopted child of a U.S. citizen. If the child is not from one of those countries and you do not adopt him or her, you cannot claim the child even if you fully support the child.

I have been living in a foreign country for years and have not filed a tax return. What should I do?
It is to your advantage to seek professional help to determine whether or not you need to file.

My business is incorporated in a foreign country. Currently it is not making a profit, and I am not receiving a paycheck. Does this have to be included on my tax return?
Yes. If you own 10% or more of a foreign corporation, or you are an officer in a foreign corporation, you are required to file with your individual income tax return IRS form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations). This includes inactive corporations not making a profit.

How Much Do We Charge?
The fees involved in addressing any tax problem or question you may face are based on either a time basis or – for filing of tax returns – on the complexity of the return involved. You will receive a quote of estimated cost for services after the problem or issue has been clarified.