Tax on Foreign Income of US Citizens or Residents
Tax on Foreign Income of US Citizens or Residents
Foreign Earned Income Exclusion
Individual US citizens and residents are taxed on their worldwide income. However, IRC Sec. 911 provides that qualified taxpayer can elect to exclude foreign earned income up to $87,600 from taxable income. (Read IRS Pub 54 for more details.) The qualifications are:
- A citizen or resident of the US who has been a bona fide resident of a foreign country for an entire taxable year; or
- A citizen or resident of US who is present in a foreign country during at least 330 full days during any period of 12 consecutive months.
Additionally, the excludable income must be “earned income”, meaning compensation for personal services actually performed in the foreign country when the taxpayer qualifies for bona fid resident or physical presence test.
Qualified taxpayers can elect to take the foreign earned income election by filing Form 2555 with their tax return. However, foreign tax paid will be allocated on total foreign source income, any foreign tax allocated to the excluded foreign earned income cannot qualify a tax credit again. Therefore, taxpayers should consider taking full foreign tax credit rather than the exclusion if the foreign effective tax rate is higher than US.
Note: Dates spent in or income from Cuba, Iraq and Libya do not qualify. (Form 2555 instruction)
Foreign Tax Credit
Generally, taxes paid to foreign governments are deductible in the same manner a US state and local taxes on Schedule A. Alternatively, taxpayers can elect to claim foreign income tax as a credit by filling Form 1116 annually. In most instances, foreign tax credit saves more income tax than a deduction, and also avoids triggering AMT. One caution is that any foreign tax allocated to excluded earned income is not eligible as either deduction or credit.
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Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com. GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.
Alan L. Olsen, CPA, Wikipedia Bio
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The American Dreams show was the brainchild of Alan Olsen, CPA, MBA. It was originally created to fill a specific need; often inexperienced entrepreneurs lacked basic information about raising capital and how to successfully start a business. Alan sincerely wanted to respond to the many requests from aspiring entrepreneurs asking for the information and introductions they needed. But he had to find a way to help in which his venture capital clients and friends would not mind.
The American Dreams show became the solution, first as a radio show and now with YouTube videos as well. Always respectful of interview guest’s time, he’s able to give access to individuals information and inspiration previously inaccessible to the first-time entrepreneurs who need it most. They can listen to venture capitalists and successful business people explain first-hand, how they got to where they are, how to start a company, how to overcome challenges, how they see the future evolving, opportunities, work-life balance and so much more..
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Insights Into Venture Capital Investing From Seminar 1 of 6 (To register for seminar 2 of 6 FREE, click here.) “In an era where financial landscapes are constantly being reshaped, it’s crucial for investors to stay ahead of the curve. The Venture Vision Webinar, a joint initiative by GROCO and Impact Venture Capital, recently hosted…
Introduction: In this interview, Alan Olsen, CPA and featured guest Micah Fink discuss how Horses and Heroes use horses to aid veteran care and much more. Transcript: Alan Olsen Welcome to American Dreams. My guest today is Micah Fink, CEO and founder of Heroes and Horses. Micah, welcome to today’s show. Micah Fink Alan, thank…
Introduction: Two dad’s discussing life balance in the hectic world of IPOs with featured guest, Travis Combs, Managing Director at the Effectus Group. In this interview, Alan Olsen, CPA, MBA and Travis address family, faith, career, client’s best interest, and trying to strike a balance. Transcript: Alan Olsen Welcome to American Dreams. My guest today is…
Introduction: A candid discussion about investment banking and philanthropy with Mike Bennett, Managing Partner of Crewe Capital. In this interview, Alan Olsen, CPA, MBA and Mr. Bennett open a window into his Crewe Capital‘s early beginnings the connection between investment banking and philanthropy. Transcript: Alan Olsen 0:01 Welcome to American Dreams. My guest today is…