Reporting Foreign Income on a US Return

Do I report income from abroad if I live in the US, even if the money stays abroad?

Yes, if you are a US citizen or resident for tax purposes, your US return generally covers worldwide income. Keeping a payment in a foreign account does not remove it from your return; the question is whether you received taxable income, not where you moved the money (IRS: taxation of US residents; Form 1040 instructions).

Include foreign wages, taxable pensions, interest and dividends even when no US information form arrives. A treaty can exempt an item or change which country taxes it. If you became a US resident during the year, the dates matter; see your first year as a US tax resident.

Where does each kind of foreign income go on Form 1040?

Report foreign income in the same place as the corresponding US income, after converting it to dollars. Foreign tax withheld is a separate credit or deduction question; do not simply subtract it from gross income (Form 1040 instructions; Publication 514).

Pay from a foreign employer is generally US-source when you work in the US. Work abroad is generally foreign-source; split pay for work in both places, usually by workdays. Foreign withholding alone does not make US work foreign-source or create a usable credit under the ordinary Form 1116 limit. Check any foreign refund or treaty relief (IRS: source of personal service income; Publication 514).

Foreign rent and sales of property have their own rules; see property abroad. For foreign funds, see funds bought outside the US.

How do I convert foreign income and foreign tax to US dollars?

Use US dollars on the return. For income and expenses, the IRS generally calls for the exchange rate when you receive, pay or accrue each item. An annual average may be used for income received evenly through the year if the exchange rate was relatively stable; a one-time payment calls for its transaction-date rate (IRS: foreign currency; IRS: exchange rate case study).

Foreign tax has its own rule. If you claim the credit when tax is paid, use the rate on the payment or withholding date. If you elect to claim tax when accrued, check “Accrued” in Form 1116 Part II on a timely original return; this choice carries into later years. The tax-year average rate generally applies, but tax paid more than 2 years after that year uses the payment-date rate. For accrued tax in a nonfunctional foreign currency, you can instead elect the payment-date rate by attaching a statement to your return by its due date, including extensions; that choice also carries forward (Form 1116 instructions). Keep the foreign-currency amount, payment date, rate used and source for each conversion.

Is my foreign pension or foreign social security taxable in the US?

A foreign pension distribution may be fully or partly taxable in the US; the taxable part generally depends on the distribution and your investment in the plan. Foreign social security is generally treated like a foreign pension or annuity unless a treaty exempts it or supplies a different rule (IRS: foreign pension distributions).

Check the type of payment, your US citizenship and residence, and the treaty's pension, social security and saving-clause provisions. A pension for government service can have a separate treaty rule. Do not assume that a foreign label such as “social insurance” makes a payment equivalent to US Social Security. Keep plan statements, contribution records and the law or benefit notice identifying the paying program.

Some foreign pension plans are foreign trusts and may also require Forms 3520 and 3520-A; exceptions apply (IRS: foreign pension distributions).

For CPP, OAS and US Social Security, see Americans living in Canada. For RRSP or RRIF withdrawals, see Canadian registered accounts on a US return.

My parents have green cards and live on a pension from China: do they have to file?

A green card holder living in the US is generally taxed as a US resident, but the filing decision depends on the kind of pension, other income, filing status and any separate filing trigger. Under the US–China treaty, a pension or other payment made by China's government, a political subdivision or a local authority under its social security system or public welfare plan is taxable only in China. Its saving clause preserves that rule for US residents who are not US citizens (US–China treaty, Article 17(2) and Protocol paragraph 2; IRS: taxation of US residents).

First confirm the payer and program from the benefit notice: an employer plan or government-service pension may fall under a different treaty provision. US citizens cannot use the treaty's resident exception for Article 17(2). Then check other income and the current Form 1040 filing requirements; if the qualifying payment is a parent's only income, a federal return may not be required. This pension or social security treaty claim alone generally does not require Form 8833, but another treaty position might (Form 8833 instructions). Foreign account reporting is a separate check; see foreign account reporting.

The China treaty does not cover Hong Kong pensions merely because the payee is Chinese (IRS: China treaty territory guidance). Classification of a Hong Kong Mandatory Provident Fund payment under US pension and trust rules needs a review; see cross-border tax.

How does the foreign tax credit work, and what limits it?

The foreign tax credit can reduce regular US income tax when qualifying foreign income tax applies to income also taxed by the US. Form 1116 generally limits the credit to the US tax attributable to taxable foreign-source income in each separate category; tax paid abroad is not automatically refunded dollar for dollar (IRS: foreign tax credit; Form 1116 instructions).

If foreign tax is later refunded or adjusted, your US credit may need a correction. Accrued tax also requires redetermination if unpaid 24 months after the end of the year it relates to. Keep foreign returns and assessments, withholding statements, payment dates, refund notices and prior Forms 1116 (Form 1116 instructions).

Can I claim the credit without Form 1116?

Yes, but only if all conditions for the election are met: all foreign-source gross income is passive for this election (including high-taxed passive income and certain export financing interest), all income and related foreign tax appear on qualified payee statements, and total creditable foreign tax is no more than $300 or $600 on a joint return (Form 1116 instructions). Qualified statements include Forms 1099-DIV and 1099-INT, certain Schedules K-1 and K-3, and similar substitute statements reporting both income and tax. A payment record alone does not establish this condition; foreign-source wages also rule out the election.

Enter the smaller of your total creditable foreign tax or regular tax on Schedule 3, Part I, line 1. The election also blocks foreign tax carryovers to or from that election year, so check prior and expected future foreign taxes before using it (Form 1116 instructions).

Should I take a credit or a deduction for foreign tax?

A usable credit usually gives more federal relief because it reduces regular US income tax dollar for dollar; an itemized deduction on Schedule A reduces taxable income only if you itemize. Compare both on the complete return when the credit is limited or unusable (IRS: foreign tax credit; Publication 514).

The choice generally applies to all qualifying foreign income taxes for the year. You generally cannot credit one qualifying foreign income tax and deduct another from that same year. A deduction year can also affect how unused credits from other years are used (Form 1116 instructions).

What does a tax treaty change, and when do I need Form 8833?

A treaty can exempt income, limit foreign withholding, change source or provide a special double-tax rule, but its saving clause may let the US tax its citizens or residents anyway. Read the article for the particular payment and the saving-clause exceptions before omitting income or claiming a credit (IRS: income tax treaties; IRS: foreign pension distributions).

Form 8833 generally discloses a treaty position that changes US tax, but the IRS waives disclosure for many individual pension, annuity and social security treaty claims. Other positions, such as certain treaty-residence claims or a treaty-only foreign tax credit, may still require it. Review the particular position; do not assume every treaty claim needs Form 8833 or that every claim is waived (IRS: claiming treaty benefits; Form 8833).

Can the foreign tax credit reduce net investment income tax?

No. The foreign tax credit does not offset the separate 3.8% net investment income tax, even when foreign tax was paid on the same investment income (26 CFR 1.1411-1(e); IRS: net investment income tax). Interest and dividends from abroad can be part of net investment income when the tax applies.

Does my state give a credit for foreign tax?

Check your state's own rules; a federal foreign tax credit does not decide the state result. California's other-state tax credit excludes taxes paid to a foreign country. New York has a limited resident credit for income tax paid to a Canadian province on qualifying income, using Form IT-112-C; Canadian federal tax does not count for that form (California Schedule S instructions; New York Form IT-112-C instructions).

Do not apply either example to another state. New York generally excludes interest and dividends from intangible assets unless connected with a business conducted in the province. Its provincial credit also coordinates with the federal credit, so gather both federal and provincial tax calculations (New York Form IT-112-C instructions).

Example

Illustrative US dollars only. A US resident receives $10,000 of interest from a foreign bank and pays $1,500 of qualifying foreign income tax on that interest. The income is reported as interest on Form 1040, even if the balance stays in the foreign account. Assume the $10,000 is taxable foreign-source income in the passive category, total taxable income is $100,000, and regular US tax used in the limit is $12,000. The illustrative limit is $12,000 × ($10,000 ÷ $100,000) = $1,200. The current credit is $1,200, the smaller of the limit and $1,500 of foreign tax. The unused $300 may qualify for a carryback or carryover (IRS: how to figure the credit). If net investment income tax applies, the foreign tax credit does not reduce that separate tax. The actual limit depends on the whole return, including deductions and other foreign income.

Different for you?

• You became a US resident this year: residence dates change which income belongs on the return. See your first year as a US tax resident.
• You live abroad and earned wages there: the foreign earned income exclusion has separate conditions. See filing while living abroad.
• You rent or sold a home abroad: see property abroad.
• Family abroad gave or left you money: see gifts and inheritances from abroad.
• You own foreign funds or a company abroad: see funds bought outside the US or US owners of foreign companies.
• You have foreign accounts: see foreign account reporting.
• You receive Canadian social security or registered-plan withdrawals: see Americans living in Canada or Canadian registered accounts on a US return.
• Your pension type, treaty position or credit carryover is unclear: gather benefit notices, foreign tax returns, tax payment receipts and prior US returns for cross-border tax review.