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Foreign earned income exclusion vs foreign tax credit Form: What You Should Know
Sep 5, 2023 — Foreign taxes are levied on certain sources of income earned abroad (this applies to those holding foreign financial assets and cash) and they are collected by the IRS. The following are some of their most common: · Foreign earned income tax is assessed on domestic dividends, rent, interest, capital gains, pension income and the sale of foreign financial instruments on the domestic market. If the earnings of a foreign financial instrument are earned on your US account, it is assessed as gross income. · Foreign withholding tax is imposed on certain payments made to foreign residents and foreign persons. If a US resident makes payments with US dollars to a foreign person, that payment is subject to the withholding tax rules. · Foreign currency income is included in determining the tax. In other words, foreign currency income includes money or property that is not held domestically. This includes compensation earned in foreign accounts, and foreign financial assets (foreign financial derivatives and foreign equity) that are held overseas. · Foreign currency earnings are exempt from taxation because they are not received from a US source. This is a good policy when you are living abroad because you can withdraw some or all of your foreign currency income for US retirement and investment purposes (assuming that the FEE is still present). When you return to the US you will receive a credit on your US tax return. If you have foreign pension income that you will receive in the form of a foreign pension, the foreign earned income exclusion will limit the amount of income of any foreign pension from which you will be taxed. You could exclude the full amount from pension, interest, dividend and capital gains earnings that are paid to overseas pension funds, but you will then pay the tax on that money. Note: If you plan to invest in foreign stocks and/or bonds, you will need to convert these into US dollars. How the Foreign Tax Credit works: Foreign Tax Credit vs Foreign Tax Credit Nov 24, 2023 — The IRS offers a tax credit for foreign taxes on income not subject to US tax and the amounts are adjusted for inflation, which can result in lower overall taxes. Earned income tax credit — Federal Tax FAQs Feb 17, 2023 — Income from foreign sources is taxed, but you don't have to pay US taxes on the payments (unless the income is treated as foreign earned income).
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