The American income tax system takes a wide view of what constitutes income. Not only will U.S. citizens be required to pay income taxes on the income earned in or from another country, but U.S. citizens may be required to pay income taxes in the United States even if they live abroad.
U.S. Citizen Living Abroad
Citizens of the United States are generally required to file income tax returns regardless of where they are living. The same income tax filing rules apply as if these citizens lived in the United States. There are even tax rules relating to expatriation taxes if a former U.S. citizen renounces her American citizenship or if a long-term resident ends his or her residency in the United States.
Foreign Earned Income Exclusion
With this exclusion, U.S. citizens who reside abroad full time in 2011 may exclude up to $92,900 of income they earned. You must pay U.S. income taxes on any amounts that exceed that threshold. In order to qualify for this exclusion, a taxpayer must meet three requirements: a taxpayer must have a tax home in a foreign country, the taxpayer must have foreign earned income and the taxpayer must be either a U.S. citizen who is a bonafide resident of a foreign country for a full tax year, a U.S. resident alien who is a citizen of a country with which the U.S. has a tax treaty and who is a bonafide resident of a foreign country for a full tax year, or a U.S. citizen or resident alien who is physically present in a foreign country for at least 330 days during a 12 consecutive month period.
Details for Foreign Earned Income Exclusion Requirements
In order to qualify for the foreign earned income exclusion, your tax home must be in a foreign country during the period that you meet the bona fide residence test or the physical presence test. A tax home is where your principal place of business or employment is regardless of where you maintain your home with your family. One way to determine where your tax home is would be to look at whether your assignment abroad is temporary or indefinite. If temporary, your tax home will not be the foreign country, but if indefinite, the location in which your new assignment is becomes your new tax home. The bonafide residence test requires that you must establish a bonafide residence in a foreign country. The physical presence requires a physical presence in a foreign country for 330 full days during a 12 consecutive month period. If you do not meet all of the requirements, you will not be able to claim the foreign earned income exclusion.
U.S. Citizen in U.S. with Foreign Income
Since the Internal Revenue Code broadly defines income, income earned from a foreign country is considered reportable income in the United States for taxpayers who must file income taxes in the United States. Both earned and unearned income must be reported. These items range from compensation earned from a foreign entity to foreign dividends, rental income that is earned abroad, foreign pension income, foreign capital gains or losses, foreign royalties and all other foreign income.
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