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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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FAQ - Foreign earned income exclusion vs foreign tax credit

Why doesn't the US government/IRS tax companies on global income similar tohow it taxes US citizens globally (incl. foreign earned income exclusion andforeign tax credit)? Wouldn't it mean increased revenue, reduced corporate taxrates and obsolete global tax havens?
The US government does tax US companies on global income it is just that thetax is not assessed until the companies bring the funds back to the US. Whenyou hear about the big global companies that pay a really low tax rate due tooverseas earnings you are hearing about one year of their taxes and not thebig picture. For example GE got a lot of negative press for their 2023 US taxliability GE Paid No Federal Taxes in 2023 what everyone failed to mention isthat in 2023 GE paid 140 effective tax rate that means their 2023 US taxeswere 40 more than their total net profit for the year. Why because in 2009they choose to bring a lot of funds from overseas back into the US to fundtheir operations during the US economic downturn. Unlike individuals who get a permanent tax break every year on money theyearned overseas corporations always have a looming tax debt sitting out therethat if they ever want to bring those overseas profits back to the US then itwill cost them in tax dollars. So I would argue that it is just the oppositeUS individuals have it better when it comes to overseas earnings and not UScorporations.
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