What Is Foreign Earned Income Under The Tax Code?

IRC § 911(b)(1)(A) provides the definition of “foreign income.” For tax purposes, this provision is important because If certain requirements are met, a taxpayer may qualify for the foreign earned income, foreign housing exclusions and the foreign housing deduction. Under certain circumstances, the value of meals and lodging provided to a taxpayer by an employer may also be excluded from income.

U.S. citizens or a resident aliens of the United States living abroad are taxed on their worldwide income. However, they may qualify to exclude from income up to an amount of their foreign earnings that is adjusted annually for inflation. In 2015, this amount was $100,800. Additionally, certain foreign housing amounts may be excluded or deducted.

Claiming The Foreign Tax Credit With Or Without Filing Form 1116

Form 1116 relates to foreign tax credits, which are intended to affect taxpayers living abroad. These credits benefit foreign taxpayers by reducing the double tax burden that arises when foreign source income is taxed by both the United States and the foreign country where the taxpayers’ income originates.

The foreign tax must meet four tests to qualify for the foreign tax credit:

  1. The tax must be a legal and actual foreign tax liability;
  2. The tax must be imposed on the taxpayer claiming the credit;
  3. The taxpayer must have paid or accrued the tax; and

What You Need To Do If You Haven’t Been Filing FBARs

Taxpayers are required to file an FBAR (Report of Foreign Bank and Financial Accounts) if they had a financial interest in or signature authority over at least one financial account located outside of the United States; and the aggregate value of all of these foreign financial accounts exceeds $10,000 at any time during the calendar year for which the taxpayer is reporting.

The FBAR is a calendar year report and must be filed on or before June 30 (with no extensions granted) of the year following the calendar year being reported. But what do you do if you are required to file FBARs and you haven’t been filing them? An experienced tax professional like one of the many at the Thorgood Law Firm can help all taxpayers resolve their problems with delinquent FBARs.