Reporting Foreign Income – Filing FBAR and Tax Forms
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Receiving Income from Foreign Income
Many United States citizens and resident aliens receive income from foreign sources. There have been recent reports about the interest of the Internal Revenue Service in taxpayers with accounts in Liechtenstein.
The interest of the IRS, however, extends beyond accounts in Liechtenstein to accounts anywhere in the world.
The IRS reminds you to report your worldwide income on your U.S. tax return.
If you are a U.S. citizen or resident alien.
You must report income from all sources within and outside of the U.S. This is true whether or not you receive a Form W-2 Wage and Tax Statement, a Form 1099 (Information Return) or the foreign equivalents.
If you are a U.S. citizen or resident alien, the rules for filing income, estate and gift tax returns and for paying estimated tax are generally the same whether you are living in the U.S. or abroad.
Employees working for a foreign government or an international organization in the U.S. are subject to some special tax rules.
The tax treatment of their compensation can vary according to whether the employee is a US citizen, a dual citizen, a green cardholder lawful permanent resident, or a foreign citizen without a green card.
Self Employment Tax
US citizens working in the U.S. must report self-employment income under the Self-Employment Contributions Act. SECA makes the contributions to the U.S. Social Security and Medicare systems for self-employed individuals.
Self-employment tax is computed on Schedule SE, Self-Employment Tax, and reported on line 56 of the 2009 Form 1040. U.S. citizens working for foreign governments and organizations outside of the U.S. are not subject to self-employment tax.
Green Card Holders
Green card holders and foreign citizens employed by a foreign government or international organization are not subject to self-employment taxes and may not voluntarily participate in the U.S. social security system. Call us for new details.
U.S. employees pay self-employment tax because the foreign government or organization is not liable for the employer’s portion of the contribution to the U.S. system.
These employees are not self-employed for any other federal tax purposes. They may not claim deductions for expenses on Schedule C. They are not qualified to establish a Simplified Employee Pension (SEP) Plan and there is no allowable deduction on line 28 of Form 1040 for contributions to any such plan.
There is much more available on this but by calling a CPA at our office we can go over all the details.
U.S. citizens and green card holders may claim deductions for un-reimbursed employee business expenses arising from their employment on Form 2106, Employee Business Expenses. The deduction is claimed on line 21 of Schedule A, Itemized Deductions, on the Form 1040.
These expenses are miscellaneous itemized deductions subject to the 2 percent of adjusted gross income limitation.
U.S. citizens and green card holders who expect to have tax due at the end of the year must file estimated tax payments because their compensation is not subject to withholding. The estimated payments ensure that employees have paid their proper amount of tax throughout the year.
Making ES Payment and Dates
Estimated payments are made using Form 1040ES, Estimated Tax for Individuals. Forms are filed quarterly:
1. April 15th,
2. June 15th,
3. September 15th, and
4. January 15th.
There is a penalty for failure to make estimated tax payments.
Foreign citizens working in the U.S. for foreign governments and international organizations are generally exempt from U.S. income tax and self-employment tax on compensation.
Foreign citizens receiving U.S. source income other than compensation such as interest, dividends, rents, royalties, etc. are generally subject to U.S. income tax. Tax treaty exemptions may apply to this income.
This income is reported on Form 1040-NR, U.S. Individual Income Tax Return Non-resident. Estimated payments may be required depending upon the amount received.
If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad.
Your worldwide income is subject to U.S. income tax, regardless of where you reside.
When to File
If you are a U.S. citizen or resident alien residing overseas, or are in the military on duty outside the U.S., on the regular due date of your return, you are allowed an automatic 2-month extension to file your return and pay any amount due without requesting an extension.
For a calendar year return, the automatic 2-month extension is to June 15.
If a taxpayer is are unable to file your return by the automatic 2-month extension date, you can request an additional extension to October 15 by filing Form 4868 before the automatic 2-month extension date.
Remember, any tax due payments made after June 15 will be subject to both interest charges and failure to pay penalties.
Reporting Foreign Income – Filing FBAR and Tax Forms
Where to File
If you are a U.S. citizen or resident alien (Green Card Holder) and you live in a foreign country, mail your U.S. tax return to:
Department of the Treasury
Internal Revenue Service Center
Austin, TX 73301-0215
Estimated tax payments should be mailed with form 1040-ES to:
Internal Revenue Service
P.O. Box 1300
Charlotte, NC 28201-1300