Do U.S. Citizens Have to Pay Taxes on Foreign Income?

Do U.S. citizens have to pay taxes on foreign income? The short answer is yes. Even if you bring in foreign income, you’ll need to include that on your required annual tax return. And all U.S. citizens are required to file a tax return each year, regardless of their location. Here’s what you need to know about paying taxes on foreign income. A financial advisor could help optimize your investments to reduce your tax liability.

Do U.S. Citizens Have to Pay Taxes on Foreign Income?

U.S. taxes are based on your citizenship status, not your location.

The United States is one of two countries in the world that taxes its citizens regardless of their location. If you are a U.S. citizen, you must file taxes each year. And that tax return must include any foreign income.

Here are four foreign income streams that must be reported:

• Wages: You must report if a foreign company pays you for goods or services.

• Interest: If you have a foreign bank account that earns interest, the earnings must be reported.

• Dividends: Just like U.S. stocks, you’ll need to include when a foreign-owned stock pays you a dividend.

• Rental income: If you own a foreign property you rent out, you must pay taxes on the rental income.

This is not an exhaustive list. But based on these examples, it should be fairly clear that any money you earn overseas or from a foreign company must be reported to your income taxes.

When Do I Need to File Taxes

Although you are required to file taxes as a U.S. citizen, you may be exempt if your income falls below a certain threshold. If your total earned income is above the threshold for the year, then you’ll need to file a tax return. Here are the minimum thresholds for tax year 2021:

If you are under 65 years old, the thresholds are as follows:

• $12,550 for single filers

• $25,100 for spouses filing jointly

• $5 for spouses filing separately

• $18,800 for heads of household

• $25,100 for qualifying widowers with dependent children

If you are over 65 years old, the thresholds are as follows:

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• $14,250 for single filers

• $27,800 for spouses filing jointly

• $5 for spouses filing separately

• $20,500 for heads of household

• $26,450 for qualifying widowers with dependent children

Not sure if you need to file taxes this year? Take this short quiz offered by the IRS.

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How to Report Your Foreign Income

If your income meets the filing threshold, then you’ll need to file a return that includes your foreign income. This is true whether or not you are living in the U.S. or abroad.

Now that you know that you have to report your foreign income, here’s how to do it.

Form 1040. You can report it on a 1040 form if you earn foreign income abroad. It’s important to keep detailed records of this income. Otherwise, it can be challenging to fill out the form accurately at tax time.

Foreign Tax Strategies

None of your foreign income will be tax-free. But there are things you can do to reduce your tax burden related to foreign earned income.

Foreign tax credit. You can file for a foreign tax credit to offset any potential double taxation. The IRS has rules in place to stop you from getting double taxes on your foreign income.

Essentially, you can claim a credit for foreign taxes you paid that year. The foreign tax credit can be taken as a deduction from your income. With that, you’ll reduce your U.S. tax burden with this credit.

Foreign earned income exclusion. The IRS offers a foreign earned income exclusion option.

If you are a U.S. citizen that lives abroad, you can file for some of your income to be excluded. Depending on your employment situation, you may also be able to exclude the value of meals and lodging provided by your employer from your income.

In order to qualify for this exclusion, you must have spent at least 330 full days abroad in the last 12 months. As of 2022, you can file to exclude up to $112,000 of foreign earned income from your taxable income. That represents big tax savings if you qualify!

Here’s where to learn more about the basics of how a tax credit works.

Bottom Line

If you earn income overseas or from foreign sources, there’s no getting around the fact that you’ll need to report that income to the IRS. And with that, you’ll have to pay U.S. income taxes on the funds. But the good news is you can offset your U.S. tax burden with exclusions and tax credits.

Foreign Income Tax Tips

• Consider working with a financial advisor to help you coordinate your tax planning needs. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Want a quick look at your income tax obligations? SmartAsset’s free federal income tax calculator can help you determine your tax liability.

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