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Do I have to declare income from foreign sources?

Umito October 25, 2024

If you are a U.S. citizen or resident alien, your income is subject to U.S. income tax, including any foreign income or income earned outside the United States. It doesn’t matter whether you reside inside or outside the United States when you earn this income.

Even if you don’t receive a Form W-2, Wage and Tax Statement, or Form 1099 from the foreign payer, you still need to report this income.

Key takeaways

If you are a US citizen or resident alienyour earnings are subject to U.S. income tax.
Under certain circumstances, including those related to the length and nature of your stay in a foreign country, you may be eligible to exclude a portion of your foreign-earned income from your U.S. federal income tax return.
The foreign tax credit is granted by the government to reduce the tax payable for certain taxpayers.
When you file your taxes, your earned income is reported on line 1 of IRS Form 1040.
Wages, bonuses, salaries, commissions, tips, and net income from self-employment are all considered forms of earned income by the IRS.

U.S. Citizen vs. U.S. Resident Alien

For tax purposes, if you are not a U.S. citizen, the Internal Revenue Service (IRS) will consider you either a resident alien or a nonresident alien. You are a resident alien of the United States for tax purposes if you meet either the green card test or the substantial presence test for the calendar year.

IRS Publication 519, U.S. Tax Guide for Foreignersprovides more information on the requirements to be considered a U.S. resident alien for tax purposes. U.S. citizens and U.S. resident aliens are required to report all income to the U.S. government so that it can be taxed appropriately.

Total income includes earned and unearned income

The amount you are taxed on includes income earned And unearned income from foreign and non-foreign sources. The IRS considers these sources of earned income:

Wages
Wages
Bonuses
Commissions
Advice
Net earnings from self-employment

According to the IRS, unearned income is income received from investments and other sources not related to employment. Some of the sources of unearned income include:

Savings Account Interest
Bond interest
Pension
Stock dividends

For detailed information on the different types of earned and unearned income, please see Publication 17, Your Federal Income Tax – For Individuals.

If you are a U.S. citizen or U.S. resident alien, you report your foreign income on your tax return where you normally report your U.S. income. In other words, on line 1 of the IRS Form 1040.

Interest and dividend income is reported on Schedule B, income from rental properties is reported on Schedule E, and so on, depending on the type of income you report.

Other rules apply and could affect your eligibility for the foreign-earned income exclusion. IRS Publication 54 provides more comprehensive information regarding the eligibility of overseas taxpayers.

Exclusion of income earned abroad

If you meet certain conditions related to the length and nature of your stay in a foreign country, you may be entitled to exclude a portion of your income earned abroad from the total income reported on your tax return. This provision of the tax code is called the foreign-earned income exclusion.

Exclusion amount

For the 2024 tax year (the tax return filed in 2025), you may be able to exclude up to $126,500 of your foreign earned income.
For the 2025 tax year (the tax return filed in 2026), this amount increases to $130,000.

Eligibility requirements

To be eligible for the foreign earned income exclusion:

You must have income earned abroad.
You must be either:
A U.S. citizen who resides in good faith in a foreign country for any period tax year
A resident alien of the United States who is a citizen or national of a country with which the United States has a tax convention in force and who is a bona fide resident of a foreign country for a full tax year
A U.S. citizen or alien residing in the United States who is physically present in one or more foreign countries for at least 330 full days in any consecutive 12-month period
Your tax house must be in a foreign country.

Your tax home is defined as the general area of your principal place of employment, where you are permanently or indefinitely engaged to work as an employee or self-employed individual, regardless of where you reside in your family home. It is important to note that your place of residence may be different from your tax domicile.

Foreign tax credit

Although it depends on the country in which you earned your income, it is likely that your foreign source income will be taxed in two countries: the United States and the country in which it was earned. To account for this, the US government offers a tax break called Foreign tax credit reduce the tax payable by certain taxpayers.

This tax credit is a non-refundable tax credit for income taxes paid to a foreign government due to foreign income tax withholding. The foreign tax credit is available to anyone who works in a foreign country or has investment income from foreign sources.

How much foreign income is tax-exempt in the United States?

In the United States, you may be eligible to exclude foreign income from tax up to a certain threshold if you work abroad. For the 2024 tax year, this amount is $126,500; for the 2025 tax year, the amount is $130,000. You may also be able to deduct overseas housing expenses.

How does the IRS know about foreign income?

The IRS is aware of unreported foreign income due to the Foreign Account Tax Compliance Act (FACTA). The law states that foreign financial institutions in a number of countries must report account information of foreign account holders to the IRS.

What happens if you don’t declare your foreign income?

If you do not report your foreign income, you may face penalties equal to a percentage of the foreign income. There are programs that serve to reduce these penalties.

The essentials

As a U.S. citizen or resident alien, you must report your foreign income to the IRS whether or not you reside in the United States.

The foreign earned income exclusion applies to foreign income earned while you resided in another country. You do not need to pay taxes on foreign-earned income that is below the foreign-earned income exclusion threshold.

As with any complex financial situation, it is always best to consult a tax advisor when filing and filing your taxes.

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