Taxation can be expensive. Double taxation can be brutal. Be sure to claim your tax credit when filing an international tax return!
If you paid or accrued foreign taxes to a foreign country or U.S. possession and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes. You can claim a credit only for foreign taxes that are imposed on you by a foreign country or U.S. possession. Generally, only income, war profits and excess profits taxes qualify for the credit. Taken as a deduction, foreign income taxes reduce your U.S. taxable income. Taken as a credit, foreign income taxes reduce your U.S. tax liability. Should you exclude either foreign earned income of foreign housing costs, you cannot take foreign tax credit for taxes on the income you can exclude. If you do take the credit, one or both of the choices may be considered revoked.
The Foreign Earned Income Tax Exclusion (FEIE) means you are exempt from paying taxes on (approximately) the first $104,100 (2018) of income in the US, right?
It depends on several factors. You are NOT eligible for Foreign Earned Income Exclusion if you:
- Receive pay as a member of the military or civilian employee of the U.S. Government or any of its agencies
- Receive pay for services conducted in international water
- Receive pay in specific combat zones
- Receive certain meals and lodging
- Receive pension or annuity payments including Social Security benefits
- Receive pay after the end of the tax year following the year in which the services that earned the income were performed
Even if none of the aforementioned situations applies, be careful! If you are considered self-employed, you are still responsible for the self-employment tax!
Individuals Living or Working in U.S. Territories/Possessions
Individuals that have income from Guam, the Commonwealth of the Northern Mariana Islands, American Samoa, the U.S. Virgin Islands or Puerto Rico will likely have to file a tax return with the tax department of the territory, and you may have to file two returns – the second being with the United States, Internal Revenue Service. To help you understand your status as a resident or nonresident of a given territory, contact the respective tax department of the territory. You may be able to exclude income earned, but there are compliance issues that must meet. You may also be eligible for a credit on excess FICA employee taxes withheld if you had more than one employer during the tax year and your income meets the threshold. Your simplest path is to ask your employer for a refund of the excess. If that does not produce desired results, you may seek a refund by filing with the IRS.
Bonus! Foreign Bank and Financial Accounts (FBAR).
The Bank Secrecy Act requires you to report certain foreign financial accounts including bank accounts, brokerage accounts and mutual funds to the Treasury Department and you must maintain certain records. If you are a United states person including citizen resident, corporation, partnership LLC, trust and estate, you must file an FBAR if you have a financial interest in or signature/authority over at least one financial account located outside the United States and the aggregate of those accounts exceeded $10,000 any time during the calendar year. Compliance is critical.
The international tax laws are complex. Use a tax professional to help you navigate the challenging compliance rules.