While the Foreign Earned Income Exclusion (FEIE) can exempt a portion of your foreign-earned income from U.S. taxes, certain other types of foreign income may still be subject to taxation. These include income such as interest, dividends, and rental income, unless specific exemptions or deductions apply.
Types of Foreign Income Subject to U.S. Taxation
- Interest: Interest earned from foreign bank accounts or foreign investments is generally subject to U.S. taxation. There are few exceptions, such as qualifying for the Foreign Tax Credit or exemptions in specific countries with tax treaties.
- Dividends: Dividends from foreign corporations are also taxable by the U.S., although taxpayers may be able to use tax treaties or the Foreign Tax Credit to reduce the tax burden.
- Rental Income: If you earn rental income from foreign properties, it is considered taxable by the U.S. This applies even if the property is located outside the U.S., though expenses related to maintaining the property may be deducted.
- Other Passive Income: Other forms of passive income, such as royalties or capital gains from foreign investments, may also be subject to U.S. tax laws.
How to Handle Foreign Income
To avoid double taxation, U.S. taxpayers may be able to use two main strategies:
- Foreign Tax Credit (FTC): This credit allows you to offset U.S. taxes by the amount of foreign taxes paid on your income.
- Tax Treaties: The U.S. has tax treaties with various countries that may reduce or eliminate taxes on certain types of foreign income. It’s important to review the specific treaty provisions for the country where you earn the income.
Reporting Foreign Income
U.S. taxpayers are required to report all income, including foreign income, on their annual tax return. Even if you qualify for exclusions or credits, it is important to report your foreign income accurately to avoid penalties.
Conclusion
While the Foreign Earned Income Exclusion provides relief for earned income from abroad, other forms of foreign income like interest, dividends, and rental income are generally taxable by the U.S. Understanding these tax rules, utilizing exemptions like the Foreign Tax Credit, and consulting tax treaties can help manage your tax liabilities when working or investing abroad.
