Unless a particular type of foreign income is exempted from Tax, the General Rule is that the United States taxes U.S. Citizens, Legal Permanent Residents, and Foreign Nationals who meet the Substantial Presence Test on all of their foreign income.
Common Examples of Worldwide Income
Presuming you are considered a U.S. person for income tax purposes (estate tax rules are different), the following are examples we come across nearly daily regarding U.S. Tax on foreign income:
- If you have passive income from a bank account in Hong Kong, Singapore or Taiwan which is not taxed abroad – you still pay tax in the United States.
- If you have a Fixed Deposit in India which matures and is then deposited back into your savings account (so that you never touch the money), you still have to report the income.
- If you have a superannuation fund in Australia and are considered a Highly Compensated Employee (HCE), then chances are you will have to report and pay tax again on the income that accumulated within the fund – even if it is not being distributed. A common example of when a person is considered an HCE, is it they are a profitable, self-employed small business in Australia with a superannuation.
- If you are earning income from investments you made prior to becoming a U.S. person (which was earned overseas and even taxed overseas), but are now considered a U.S. person for tax purposes, you have to report the current income (such as interest, dividends or capital gains) as U.S. income since you are currently a U.S. person filing a US tax return for income you are receiving now (or is currently accumulating)
- If you earned income in a jurisdiction that does not tax personal income, you still have to report the income under US tax return (even if you qualify the Foreign Earned Income Exclusion, you still have to report the income and claim the exclusion)
**If you paid foreign tax, but that tax was refunded to you, you do not receive a foreign tax credit – since technically you did not pay the foreign tax.
If you are receiving payments from a foreign pension it is important to review the tax treaty to determine whether you will be taxed.
There are various different treaties (60+ different countries), which although they are very similar have small nuances. One major nuance in many tax treaties between the United States and several foreign countries is how the U.S. taxes pensions. For example, there may be different tax rules depending on whether the pension was public pension and/or private pension — as well as where the person resided when they were working/earning the foreign pension, and whether the person would have been taxaed by the foreign country at the time the pension was being earned
Did Not Report Foreign Income in Prior Years?
If you did not report your Foreign Pensions or Other Income in prior years, one of the safest methods for getting back into compliance is through offshore voluntary disclosure. Depending on your facts and circumstances you may have various options available to you.
Golding & Golding, A PLC
We have successfully represented clients in more than 1,000 streamlined and voluntary disclosure submissions nationwide and in over 70-different countries.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.