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5 Important Things You Need to Know About U.S. Tax on Overseas Income

Posted on September 16, 2020 by The Times USA News

Tax season is already difficult enough to navigate. But if you’ve earned foreign income this year, you may have to report it on your U.S. tax report, even if you live abroad.

Whether you work in a foreign country or conduct business with a foreign company, you need to understand if the foreign income you make is taxable. To get you started, here are five important things you should know about tax on overseas income.

  1. When to File a Tax Return on Overseas Income

Your filing status and the amount you make typically dictate whether you need to file a tax report on income from foreign sources. For example, if you are a United States citizen who’s lived or worked in a foreign country, you likely need to file a U.S. tax return that shows your gross foreign income. That said, if you pay taxes in a foreign country, you may qualify for a foreign tax credit.

When you file, you will need to report all income received over the past year, like you would normally. Don’t exclude anything yet.

  1. You Must Convert Foreign Currency to U.S. Dollars

It may seem obvious, but this detail often goes overlooked. When you report your foreign income, you have to convert the currency to U.S. dollars first.

If this has already been done for you through the transfer process, you won’t have to worry about it. But it does take time to do, so don’t leave this task to the last minute.

  1. Your State May Require Additional Forms

To report overseas income tax, you will need to fill out Form 1040 or 1040X. If you qualify for foreign earned income exemptions, you will need to attach Form 2555.

But your state may also require other forms, like 1099-MISC filings. The IRS may forward your 1099 information to your state, but not all states are covered by the IRS’s Combined Federal/State Filing program. Make sure you check 1099 state filing requirements for your area to avoid any penalties.

  1. How to Get an Exclusion From Tax on Overseas Income

You may qualify for exemption on foreign income tax if you meet the proper criteria. For example, if you live and work outside of the United States and meet the Physical Presence or Bona Fide Residence Test, you can file for a foreign income tax exclusion. This may also apply to you if you support a U.S. Armed Forces member in overseas combat zones.

You can use this Interactive Tax Assistant tool to help you figure out what income is taxable and if you qualify for certain exemptions.

  1. Visit the International Individuals Site for More Help

Whether you are a resident alien or a U.S. citizen living abroad, it can get confusing about what you have to report on your taxes. The IRS recognizes this fact, and they’ve put together a page on their website dedicated to answering these questions for you. Visit the International Individuals page for more help.

Get Your Taxes Straight Before It’s Too Late

These five basics will help you understand if reporting overseas income on your next tax return is necessary. By keeping your finances straight throughout the year, you will be in better shape heading into tax season. When it comes to filing tax on overseas income, you’ll be prepared and ready to avoid any penalties.

Looking for more financial help? Visit the Business section of our site to keep up with the latest business news and advice.

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