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Tax FAQ:

International & Foreign Taxation

Explore International & Foreign Taxation, including foreign income, tax treaties, foreign tax credits, and worldwide income.

Search Our Tax FAQ Subcategories Below

International & Foreign Taxation

Foreign earned income is compensation received for personal services performed in a foreign country or countries. It can include wages, salaries, professional fees, and other compensation for services performed abroad.

Generally, U.S. citizens and resident aliens are subject to U.S. income tax on their worldwide income, including foreign earned income. Certain taxpayers may qualify for the foreign earned income exclusion or other tax benefits.

Generally, the location of the employer does not by itself determine whether compensation qualifies as foreign earned income. The location where the services are physically performed is an important factor.

Generally, U.S. citizens and resident aliens must report foreign wages and other worldwide income on their U.S. tax return, even when the income was earned outside the United States.

Generally, income received for personal services performed in a foreign country can qualify as foreign earned income. Additional rules may apply to self-employment income and self-employment taxes.

Eligible taxpayers may be able to exclude a limited amount of foreign earned income under the foreign earned income exclusion. Eligibility generally requires a foreign tax home and satisfaction of either the bona fide residence test or physical presence test.

Not necessarily. A taxpayer may potentially qualify under the physical presence test by being physically present in a foreign country or countries for at least 330 full days during a qualifying 12-month period.

Generally, foreign earned income refers to income from personal services. Interest, dividends, and many other investment earnings are generally not considered earned income for purposes of the foreign earned income exclusion.

A taxpayer generally cannot claim a foreign tax credit or deduction for foreign income taxes attributable to income that was excluded under the foreign earned income exclusion.

Foreign earned income generally must be reported on the appropriate U.S. tax return. Taxpayers claiming the foreign earned income exclusion generally use Form 2555 to determine the amount that may be excluded. 

The foreign earned income exclusion allows qualifying U.S. taxpayers who live or work abroad to exclude a certain amount of qualifying foreign earned income from U.S. federal income tax.

Generally, a taxpayer must have foreign earned income, a tax home in a foreign country, and satisfy either the bona fide residence test or the physical presence test.

The bona fide residence test generally requires a U.S. citizen or qualifying resident alien to be a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.

The physical presence test generally requires the taxpayer to be physically present in a foreign country or countries for at least 330 full days during a period of 12 consecutive months.

U.S. tax law does not specifically require a foreign work or resident visa to qualify for the foreign earned income exclusion. However, the taxpayer must satisfy the applicable tax requirements and should comply with the laws of the foreign country.

Certain resident aliens may qualify. The eligibility rules can depend on citizenship, nationality, tax residency, treaty provisions, and whether the taxpayer satisfies the applicable residence or physical presence requirements.

Potentially. The source of earned income is generally determined by where the services are performed rather than simply by the location of the employer.

No. The exclusion generally applies to qualifying foreign earned income rather than all types of foreign income. Investment income and other unearned income generally do not qualify.

Yes. Claiming the foreign earned income exclusion can affect eligibility for certain credits and deductions and can affect the ability to claim a foreign tax credit for taxes attributable to excluded income.

Eligible taxpayers generally claim the exclusion by completing and filing Form 2555 with their federal income tax return. 

Foreign income generally refers to income received from sources outside the United States. It can include foreign wages, business income, interest, dividends, rental income, capital gains, and other types of income.

Generally, U.S. citizens must report their worldwide income, including taxable income from foreign sources, on their U.S. tax return.

Generally, resident aliens are taxed in a similar manner to U.S. citizens and generally must report income from sources both inside and outside the United States.

No. Foreign income is not automatically exempt from U.S. taxation merely because it was earned or received outside the United States.

 

Yes. The same income can potentially be subject to tax by the United States and a foreign country. Foreign tax credits, deductions, and tax treaties may help address certain instances of double taxation.

Generally, taxable foreign bank interest must be reported as part of worldwide income. Separate reporting requirements may also apply to foreign financial accounts.

Generally, U.S. citizens and resident aliens must report taxable foreign rental income. Expenses and deductions may be available subject to applicable tax rules.

Generally, taxable foreign interest, dividends, capital gains, and other investment income must be reported by U.S. citizens and resident aliens.

Generally, receiving income in a foreign currency does not eliminate the U.S. reporting requirement. Foreign currency amounts generally must be converted into U.S. dollars for U.S. tax reporting.

Failure to properly report taxable foreign income can result in additional tax, interest, penalties, and potentially additional reporting consequences depending on the circumstances.

The foreign tax credit is generally a U.S. tax benefit that may allow eligible taxpayers to receive a credit for certain foreign income taxes paid or accrued on foreign-source income.

Eligible taxpayers who pay or accrue qualifying foreign income taxes may be able to claim a foreign tax credit, subject to applicable limitations and requirements.

The foreign tax credit can help reduce double taxation when the same foreign-source income is subject to both foreign income tax and U.S. income tax.

No. Only qualifying foreign taxes generally can be claimed as a foreign tax credit, and specific requirements and limitations apply.

In certain circumstances, taxpayers may be able to deduct eligible foreign taxes instead of claiming a foreign tax credit. The choice can have different tax consequences.

Generally, a taxpayer cannot claim a foreign tax credit or deduction for foreign taxes attributable to income that was excluded under the foreign earned income exclusion.

Individuals generally claim the foreign tax credit using Form 1116 when required, although certain taxpayers may qualify for an exception from filing that form.

Yes. The foreign tax credit is generally subject to limitations based on the amount of U.S. tax attributable to foreign-source income.

Depending on the type of foreign tax and applicable rules, unused foreign tax credits may potentially be carried to other tax years.

Tax treaties can affect how certain foreign taxes and income are treated. The applicable treaty and specific circumstances must be reviewed to determine whether treaty provisions apply. 

A foreign trust is generally a trust that is not treated as a domestic trust under U.S. tax rules.

The U.S. tax treatment of a foreign trust depends on factors such as the trust’s classification, its income, beneficiaries, grantors, and applicable U.S. tax rules.

Certain U.S. taxpayers with ownership, transfers, distributions, or other interests involving foreign trusts may have separate U.S. reporting obligations.

A distribution from a foreign trust may have U.S. tax consequences depending on the nature of the distribution, the trust’s classification, and the taxpayer’s circumstances.

No. The tax treatment depends on factors such as whether the distribution represents income, principal, or other amounts and the applicable U.S. tax rules.

Yes. A foreign trust can have U.S. beneficiaries, but additional tax and reporting rules may apply.

A grantor trust is generally a trust whose income is attributed to the grantor for U.S. tax purposes under applicable rules.

A foreign nongrantor trust is generally treated as a separate taxpayer for U.S. tax purposes rather than having all of its income automatically attributed to the grantor.

Yes. Certain foreign trust interests can create reporting requirements that are separate from reporting taxable income on the individual’s regular income tax return.

Failure to satisfy applicable foreign trust reporting requirements can result in significant penalties and other tax consequences.

A nonresident alien is generally an individual who is not a U.S. citizen and does not qualify as a resident alien under U.S. tax rules.

Nonresident aliens are generally subject to U.S. income tax on certain U.S.-source income and income effectively connected with a U.S. trade or business. Special rules determine how different types of income are taxed.

A nonresident alien who has a U.S. tax filing obligation generally files Form 1040-NR rather than Form 1040.

Generally, nonresident aliens are not taxed by the United States on all worldwide income in the same manner as U.S. citizens and resident aliens. U.S.-source income and certain income connected with a U.S. trade or business are generally subject to U.S. taxation.

Yes. An applicable U.S. income tax treaty can reduce or eliminate U.S. tax on certain types of income when the taxpayer meets the treaty’s requirements.

Certain U.S.-source payments to nonresident aliens can be subject to federal withholding requirements.

Generally, nonresident aliens cannot claim the standard deduction, although limited exceptions can apply depending on circumstances and treaty provisions.

A nonresident alien who is required to file a U.S. tax return generally needs an appropriate taxpayer identification number.

Yes. A nonresident alien can receive compensation for services performed in the United States, subject to applicable U.S. tax and withholding rules.

Yes. An individual may become a resident alien for U.S. tax purposes by meeting applicable residency requirements, such as the substantial presence test or green card test. 

A permanent establishment is generally a fixed place of business or other business presence that can cause a foreign business to become subject to taxation in another country under applicable domestic law or a tax treaty.

Permanent establishment rules can determine whether a foreign business’s activities in another country create a sufficient business presence for that country to impose income tax.

Permanent establishment concepts are commonly found in U.S. income tax treaties and can affect how business profits of foreign enterprises are taxed.

An office may potentially contribute to creating a permanent establishment depending on the applicable treaty, the nature of the office, and the activities conducted there.

Employees or other personnel may contribute to creating a permanent establishment depending on their activities, authority, location, and the applicable treaty provisions.

Not necessarily. Simply having customers in another country does not automatically mean a permanent establishment exists. The specific business activities and applicable tax rules must be examined.

A warehouse may or may not create a permanent establishment depending on its use, the business activities conducted there, and the applicable treaty provisions.

If a permanent establishment exists, the foreign business may become subject to tax on profits attributable to that permanent establishment under applicable tax rules.

A treaty may limit the circumstances under which a foreign business can be taxed by another country based on the existence of a permanent establishment.

The determination depends on applicable domestic tax law, relevant tax treaties, the business’s activities, and the specific facts and circumstances.

A resident alien is generally an individual who is not a U.S. citizen but meets the requirements to be treated as a U.S. resident for tax purposes.

An individual can generally qualify as a resident alien by meeting the green card test or substantial presence test, subject to applicable exceptions and special rules.

Generally, yes. Resident aliens are generally taxed in a manner similar to U.S. citizens and must generally report income from both U.S. and foreign sources.

A resident alien generally files Form 1040, the same general federal income tax return used by U.S. citizens.

Generally, resident aliens are eligible for many of the same federal income tax deductions available to U.S. citizens, subject to the applicable requirements.

Yes. A resident alien who pays or accrues qualifying foreign income taxes may potentially claim a foreign tax credit subject to applicable requirements and limitations.

Certain resident aliens may qualify for the foreign earned income exclusion if they meet the applicable requirements.

Yes. An individual can potentially be a resident under the tax laws of both the United States and another country. Tax treaty provisions may provide rules for resolving dual residency.

For U.S. tax purposes, a lawful permanent resident generally meets the green card test and is treated as a resident alien unless an applicable exception or treaty rule changes the result.

An individual can have different U.S. tax residency statuses during the same tax year. Special rules may apply to individuals who are resident aliens for only part of a year. 

A tax treaty is an agreement between the United States and another country that establishes rules for taxing certain types of income and can provide reduced tax rates, exemptions, or other tax benefits.

Depending on the treaty and the taxpayer’s circumstances, a treaty may reduce or eliminate U.S. tax on certain types of income received by eligible foreign residents.

No. The United States has income tax treaties with numerous countries, but not every country has a comprehensive income tax treaty with the United States.

In certain circumstances, U.S. citizens may receive treaty benefits, although many treaties contain a saving clause that preserves the country’s ability to tax its own citizens and residents.

Potentially. A resident alien who is also a resident of another country under that country’s tax laws may be able to use applicable treaty provisions if the treaty provides a mechanism for resolving dual residency.

Yes. Certain treaty provisions can reduce or eliminate U.S. withholding on qualifying payments to eligible foreign residents.

A treaty-based return position generally occurs when a taxpayer relies on a treaty provision to claim that a U.S. tax rule should be modified, reduced, or overridden.

In certain circumstances, taxpayers claiming a treaty position that reduces or potentially reduces U.S. tax may be required to disclose the position on Form 8833.

Not necessarily. Individual states may have their own rules regarding income tax treaties and may not necessarily follow federal treaty provisions.

You generally need to review the specific treaty between the United States and the relevant foreign country, including the article covering the particular type of income and the requirements for claiming the treaty benefit. 

A tax haven is generally a jurisdiction known for relatively low or no taxes, financial privacy, or other features that can attract foreign investment or income.

Simply holding assets or maintaining an account in another country is not necessarily illegal. However, U.S. taxpayers must comply with applicable tax and foreign financial account reporting requirements.

Generally, U.S. citizens and resident aliens must report taxable worldwide income, including income earned through foreign accounts or investments.

Certain foreign financial accounts may be subject to separate reporting requirements depending on the account balances, ownership, and taxpayer’s circumstances.

Generally, moving money or investments to a foreign jurisdiction does not by itself eliminate U.S. federal income tax obligations.

Businesses may conduct legitimate international operations and structure transactions across jurisdictions, but they must comply with U.S. tax laws and applicable international reporting requirements.

Failing to report taxable foreign income or required foreign assets can result in additional taxes, penalties, interest, and potentially more serious consequences.

No. A taxpayer may have legitimate business, investment, employment, family, or other reasons for receiving income or maintaining assets in a foreign jurisdiction.

Yes. Where an applicable tax treaty exists, its provisions may affect how certain income is taxed and how double taxation is addressed.

Taxpayers with previously unreported foreign income or assets should evaluate their filing and reporting obligations and consider obtaining professional tax advice before submitting corrective filings.

Worldwide income generally refers to income from all sources, including both U.S. and foreign sources.

Generally, U.S. citizens and resident aliens must report their worldwide income on their U.S. federal income tax returns.

Generally, no. U.S. citizens and resident aliens living abroad generally remain subject to U.S. income tax on their worldwide income.

Yes. Foreign wages and other compensation for services performed outside the United States are generally part of worldwide income for U.S. citizens and resident aliens.

Generally, yes. Taxable foreign interest, dividends, capital gains, rental income, and other investment income can be included in worldwide income.

Potentially. Eligible taxpayers may be able to claim a foreign tax credit or, in certain circumstances, a deduction for qualifying foreign taxes.

Generally, income from a foreign business can be part of worldwide income for U.S. citizens and resident aliens, although specialized international tax rules may also apply.

Foreign retirement income may be subject to U.S. tax depending on its type, source, applicable treaty provisions, and the taxpayer’s circumstances.

Generally, the absence of a foreign information form does not eliminate the obligation to report taxable income.

Tax treaties and foreign tax credits can help address double taxation in certain circumstances, but the specific treaty provisions and tax rules must be reviewed for the particular income involved. 

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