Many foreign workers have problems when it comes to filing their taxes especially if they derived their income in different ways. US workers who are employed in a foreign country will find this overview helpful in understanding the basics of income inclusion and what to include in their income tax return.
Personal income or earned income is a term associated with personal services rendered or performed such as professional fees, salaries or wages. The income is sub-divided into 3 categories namely – Earned, Unearned and Variable. Earned income, as mentioned, includes salaries and professional fees and also bonuses, tips and commissions. Other earned income includes tangible benefits such as lodgings, car used and other non-cash income provided by the company to its employees.
Unearned income on the other hand, includes unrealized earnings such as dividends, pensions, capital gains, interest and social security benefits. To understand what unearned income is, it is advisable to read the Tax Guide for US Citizens and Residents Aliens Abroad Chapter 4. Publication 54. Variable incomes include income coming from royalties, rents and the tax payer’s business profits.
Exclusions to Foreign Earned Income
Exclusions to the declaration of foreign earned income include salaries that one receives as an employee of the US government, unallowable moving expenses, payments that are received after the tax year after the year when the service resulted to an earned income. Aside from these exclusions, pensions such as social security benefits should not be included to the foreign earned income.
Understanding the Source of Your Income
To understand what to include in one’s earned income, it is important to know the place where the service was rendered. When the tax payer performed the services in the US, he or she must declare it as US source income. It is important to note that the type of payment or how one is paid has no relevancy or effect to the filling of the tax.
If the tax payer has no idea on the amount of time the work or when service was rendered in the US, he or she must estimate by calculating and determining via using a formula provided by the IRS = (No. of days worked in the US in a year) / (No. of workdays during the year the payment was made) x Total Income.
This is just a brief overview of the exclusions when filing tax in the US and should not be construed as legal advice. It is important to contact your financial advisor for more information on US tax filing.
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