How to Report Foreign Income: A Complete Guide

If you’re wondering how to report foreign income, the only way to do so is by listing all the different types of earnings you received on Form 1040 (US Individual Income Tax Return).

Since the IRS requires all US taxpayers to report all types of income they receive in a year, whether it’s generated locally or internationally, you must do this properly to avoid any issues.

Besides this, there are several more IRS forms you may be required to fill out depending on the value of your earnings and other important factors.

Key Takeaways

• The key to understanding how to report foreign income is to identify the type of earnings you receive and learn all US and international tax regulations that apply to your situation.
• Some of the essential IRS forms for reporting your foreign income include Form 1040, Form 1116, Form 2555, and Form 1099-DIV.
• The Foreign-Earned Income Exclusion (FEIE) is a US tax benefit that allows taxpayers to exclude a specific amount of their foreign income from US taxes.
• Other essential forms or documents for reporting foreign income include FinCEN Form 114, Form 8938, Form 3520, Form 3520-A, and Form 5471.

How to Report Foreign Income to the IRS

To report foreign income to the IRS, you can either use Schedule B (Form 1040) or Form 8938, also known as the Statement of Foreign Financial Assets.

If you are a self-employed US expat, then you must file an expat tax return and pay the combined 15.3% Medicare and Social Security taxes.

Before we delve further into the Internal Revenue Service’s requirements for reporting foreign income, let’s first define what foreign income means and what it encompasses in terms of U.S. tax laws.

What Is Foreign Income?

Foreign income refers to any income received in exchange for the services you’ve performed while working abroad.

Your foreign income may be in the form of:

• Wages, salaries, allowances, compensation benefits, and bonuses earned from foreign employers or companies

• Bonds from foreign bank accounts or interests from foreign partnerships and business deals

• Capital gains earned from selling foreign stocks, real estate, and bonds

• Rent payments from renting foreign properties

• Dividends from corporations abroad

• Gambling winnings and royalties earned internationally

• Self-employment earnings from businesses and trades operated overseas

What Is Foreign-Earned Income?

Foreign-earned income refers to the income you make in exchange for offering your services or labor while working or residing abroad. In other words, it refers to your regular salaries and wages.

In contrast, foreign income is a broader term that includes both earned income, such as wages and salaries, and other types of income in the form of interest, dividends, rent payments, and the like.

Also, between foreign income and foreign-earned income, only foreign-earned income is considered for the Foreign-Earned Income Exclusion (FEIE).

What Is FEIE?

The FEIE is an essential US tax benefit that enables qualifying US citizens and residents to exempt a percentage of their foreign-earned income from US taxation and significantly reduce their US tax liabilities.

If your foreign-earned income is less than the latest foreign income threshold set by the IRS, you can exempt the entire amount of your earnings when you report your foreign income.

On the other hand, you can use Form 2350, an extension form used to inform the IRS that you need more time to file your tax returns. It applies when you need more time to meet the physical test or bona fide residence test needed to qualify for the FEIE.

What Is FATCA?

The FATCA (Foreign Account Tax Compliance Act) is a law that prevents tax evasion. Under the said law, financial institutions in foreign countries or nations are obliged to report on all assets held by US residents or US citizen account holders.

Taxpayers with foreign account holdings that exceed $50,000 who fail to report their assets may be subject to a $10,000 failure to file a penalty and a 40% penalty for underestimated taxes following the non-disclosure of their accounts.

It is possible to incur additional penalties that can reach up to $50,000 if the taxpayer continues to disregard their tax obligations even after receiving an IRS notification.

4 Key IRS Forms for Reporting Foreign Income

#1. Form 1040 and Its Schedules

The first income IRS form that you need to take note of if you need to report foreign income is Form 1040, also known as the U.S. Individual Income Tax Return.

If you want to know how to report foreign income on your 1040, you must declare all types of earnings you received within the year on the said form. You can use the following Schedules to report specific types of foreign income, foreign-earned income, or claim-specific deductions:

• Schedule B. With this, you can report your foreign dividend income on your US returns.

• Schedule A. This Form 1040 attachment is used to report foreign mortgage interest.

• Schedule E. With this Schedule, you can report rental income derived from foreign properties.

• Schedule 1, Line 8. This is the document that allows you to report your FEIE claims.

• Schedule 3, Line 1. Use this attachment if you are eligible to claim the Foreign Tax Credit.

#2. Form 1116 - Foreign Tax Credit

Aside from knowing how to report foreign income, you should also know how to claim certain tax deductions and credits on your foreign earnings.

You can use the IRS Form 1116, or Foreign Tax Credit, to reduce the amount of US income taxes you owe.

By deducting the foreign taxes you have already paid abroad from your US tax liability, you prevent instances of double taxation. Moreover, you are eligible to claim FTC on your foreign income when you pay foreign taxes to a provincial or local government.

You will also be qualified to claim the FTC if you were required to pay taxes by applicable laws in the foreign country where you stayed or worked to pay taxes. However, before doing so, you must ensure that the foreign income you are reporting is not covered by FEIE.

#3. Form 2555 - Foreign-Earned Income Exclusion

Form 2555, also known as Foreign-Earned Income Exclusion (FEIE), is used to deduct foreign-earned income from your US tax balances. The IRS proposes that the groups of taxpayers that are eligible for this tax benefit include:

• US citizens or US resident aliens who pass the physical presence test, meaning they were physically present abroad for a minimum of 330 days for a year or 12 continuous months

• US citizens who meet the bona fide residence test of a foreign nation or country or have been bona fide residents overseas for at least one full tax year

• US resident aliens who are either nationals or citizens of a foreign country that has an existing income tax treatywith the US

#4. Form 1099-DIV

Many taxpayers abroad are also wondering how to report foreign income without a 1099 form. In such cases, you need the Form 1099-DIV, Dividends and Distributions variation of this document.

You only need to use it when reporting foreign income after you have paid or withheld foreign taxes on stock distributions and dividends. Additionally, qualified dividends paid by a foreign corporation or company must also be reported on this form.

Foreign-Earned Income Exclusion vs. Foreign Tax Credit

The main difference between the Foreign-Earned Income Exclusion and the Foreign Tax Credit is that the FEIE allows eligible taxpayers to exclude a specific amount of their foreign earnings from their US taxable income.

Meanwhile, the FTC lets taxpayers claim dollar-for-dollar credits on their US tax liability for foreign income taxes they have withheld or paid on their foreign income.

Plus, the FTC usually suits high-earning taxpayers who pay higher income tax rates abroad. In contrast, the FEIE is more suitable for low-income earners working abroad.

Additional Forms, Requirements, and Due Dates

#1. FBAR (FinCEN Form 114)

You need to fill out FinCEN Form 114 for every calendar year that your foreign accounts’ aggregate amounts exceed $10,000.

FBAR Due Date and Extension

The due date for submitting FBAR is April 15th of the year following the calendar year reported on your annual report. If you missed the deadline, you don’t need to file for an extension because you are automatically granted an extension until October 15.

#2. Form 8938 - Statement of Foreign Financial Assets

You should use Form 8938 to report your foreign accounts to the IRS, specifically if your foreign financial assets meet the specific reporting thresholds. Examples of the assets you can report on this form include:

• Deposit and custodial financial accounts held at financial institutions overseas
• Foreign securities or stocks not held in a financial institution or account
• Foreign mutual funds, private equity funds, or hedge funds
• Foreign-issued annuity contracts or life insurance that have a monetary or cash value

You cannot use Form 8938 to replace the FBAR (FinCEN Form 114). After all, it should be filed with the IRS, while the FBAR should be filed directly with the office of the Financial Crimes Enforcement Network (FinCEN).

Form 8938 Due Date and Extension

The due date for filing Form 8938 is April 15 of each year. The automatic due date extension is until June 15, two months after the deadline.

#3. Forms 3520 and 3520-A

Form 3520 is also called Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. It is filed by US taxpayers who received or are expected to receive income from an inheritance overseas or a foreign trust.

On the other hand, Form 3520-A (Annual Information Return of Foreign Trust With a U.S. Owner) should befiled by individuals managing foreign grantor trusts with taxpaying US citizens or residents.

Forms 3520 and 3520-A Due Dates and Extensions

The deadline for filing Form 3520 is on April 15. If you need to file an extension after that, you should submit Form 7004. On the other hand, Form 3520-A must be filed on or before March 15.

#4. Form 5471

US citizens, partnerships, estates, corporations, or trusts with at least 10% ownership in corporations based or established overseas must file Form 5471, or Information Return of US Persons With Respect to Certain Foreign Corporations.

In truth, Form 5471 isn’t required for tax filing or income reporting purposes. Rather, the IRS requires the said form to monitor which individuals and entities in the US have foreign corporation ownership.

By keeping a record of US residents and citizens who own or share ownership of foreign-based firms, the IRS can prevent taxpayers from hiding their assets.

Form 5471 Due Dates and Extensions

You must file Form 5471 on or before March 15, while an extension can be requested until April 15. This doesn’t apply if you are an expat, in which case you may extend filing your Form 5471 until June 15.

Common Challenges in Reporting Foreign Income

Some of the most common challenges in reporting foreign income include:

• Determining one’s taxable income
• Handling conversations regarding foreign currencies
• Assessing your tax residency status
• Dealing with fluctuations in foreign exchange rates and conversions
• Understanding treaties for international taxation

The key to resolving these challenges is to stay updated and informed about foreign and US tax codes. So, it’s highly recommended that you take the time to read the instructions for submitting each of the required documents when reporting foreign income.

If possible, seek assistance from your employer or check with the nearest government agency in your area for a more detailed tax service on your overseas tax obligations.

Lastly, keep an eye out for the latest news and updates on foreign tax treaties, tax laws, and global currency rates.

How to File U.S. Taxes Without a W-2

To file your U.S. taxes without a Form W-2, you must first determine whether the country where you are working has a tax form or document that’s equivalent to the U.S. W-2 form. Most foreign countries that levy income taxes should have one.

Examples of countries with a foreign income W-2 include:

• Canada (T4 Slip)
• Mexico (Form 37, Annual Constancy of Wages and Salaries)
• Australia (PAYG payment summary
• Great Britain (Form P60)
• Switzerland (Salary Certificate)
• Germany (Income tax certificate or Ausdruck der Lohnsteuerbescheinigung)
• Japan (Japanese tax statement or Gensen-Choshu-Hyo)
• Singapore (IR8A)
• Philippines (BIR Form 2316)

Now, you may be wondering how to report foreign income without a W-2 form equivalent or a document that assesses your year-end taxes in the country where you are based.

You can use Form 4852, or Substitute for Form W-2, Wage and Tax Statement, instead. It’s often used by taxpayers who did not receive a copy of their Wage and Tax Statement from their employer.

If you are unable to secure any of the documents we’ve suggested, your last resort is to set up an appointment with the IRS Taxpayer Assistance Center.

How Paystub.org Can Help

Paystub.org can help you ensure you properly report your foreign income and file your U.S. taxes on time using the W-2 form generator.

Our online tool lets you report your annual income and withheld tax amounts if you are unable to secure Form W-2 in time before the tax filing deadline. All you need to do is enter all the key information, and you’ll have a completed form ready for download.

Besides that, you can also use our generator’s built-in calculator feature to calculate your taxes, deductions, and gross and net earnings. Once your document is ready, you can save an electronic copy or print it, depending on your preferences and needs.

Final Thoughts

When it comes to grasping how to report foreign income, it’s crucial to know your tax and income situation to determine the correct tax forms and documents to use.

It is also essential to become familiar with other key aspects of reporting your foreign earnings to the IRS. Specifically, you must know how to report foreign income in a US tax return and understand the tax rules in the country where you are working or operating your business.

By taking note of all the tips and guidelines described in this article, you can file your taxes and report your foreign earnings seamlessly and error-free.

How to Report Foreign Income FAQs

#1. How much foreign income is tax-free in the U.S.?

The amount of foreign income exempted from taxation in the U.S. is adjusted every year, but the maximum exemption limit for the tax year 2024 is set at $126,500 per taxpayer.

Additionally, married individuals who are both working abroad and have duly passed the tests for physical presence and bona fide residence can take advantage of a combined tax-free foreign income worth as much as $253,000.

#2. How does the IRS know about foreign income?

The IRS knows about foreign income because it requires US taxpayers to report all types of income they make in a year, regardless if it is in the form of regular earnings, dividends or shares, rent payments, or foreign financial assets.

#3. What happens if you don't report foreign income?

If you don’t report foreign income, you will possibly face penalties as a consequence. These are typically equivalent to a percentage or portion of the foreign income you failed to report.

#4. How is the foreign tax credit calculated?

The foreign tax credit is calculated by multiplying the total US tax liability by the ratio of the foreign taxable income to the total taxable income.