Yes, U.S. citizens are generally required to pay taxes on foreign unearned income, such as interest, dividends, or capital gains, even if the income is earned abroad. However, there are exceptions that may reduce or eliminate U.S. tax liability, such as exclusions or tax credits.
Types of Foreign Unearned Income Subject to U.S. Tax
- Interest: Interest earned from foreign bank accounts or other investments is typically taxable by the U.S. This includes income from foreign savings accounts, bonds, and other interest-bearing assets.
- Dividends: Dividends from foreign corporations are also taxable by the U.S. taxpayers may be able to use a Foreign Tax Credit or tax treaties to reduce the tax burden on this income.
- Capital Gains: Capital gains from the sale of foreign investments (stocks, real estate, etc.) are subject to U.S. taxation. However, taxpayers may be able to use exemptions or credits to offset some of the taxes due.
Reducing U.S. Tax Liability on Foreign Unearned Income
U.S. taxpayers can potentially reduce taxes on foreign unearned income through the following methods:
- Foreign Tax Credit (FTC): This credit allows you to offset U.S. taxes with the amount of foreign taxes paid on the income, helping to avoid double taxation.
- Tax Treaties: The U.S. has tax treaties with many countries that may reduce or eliminate taxes on certain types of income. It’s important to review specific treaty provisions for the country where the income was earned.
- Exclusions: Certain income types, such as foreign earned income, may qualify for exclusions under the Foreign Earned Income Exclusion (FEIE), though this generally does not apply to unearned income like dividends or interest.
Reporting Foreign Unearned Income
U.S. taxpayers must report all income, including foreign unearned income, on their tax return. Even if foreign taxes were paid or an exclusion applies, accurate reporting is required to avoid penalties.
