On the first Monday of each month, Gary offers advice regarding the business side of writing.
Reporting Foreign Income Required
If you are a United States citizen with income from sources outside the United States (foreign income), you must report all such income on your tax return unless it is exempt by United States law. This is true whether you reside inside or outside the United States and whether or not you receive a Form W-2 (if an employee) or Form 1099 (self-employed) from the foreign payer. This applies to earned income (such as wages, commissions, professional fees and author royalties) and unearned income (such as interest, dividends, capital gains, pensions and rents).
The United States taxes the worldwide income of U.S. citizens, resident aliens and domestic corporations, without regard to whether the income arose from a transaction or activity originating outside its geographic borders.
Qualifying for the Foreign Earned Income Exclusion
If you are a U.S. citizen or a resident alien of the United States and you live abroad, you may qualify to exclude from income up to $92,900 (2011 amount) of your foreign earnings. In addition, you can exclude or deduct certain foreign housing amounts.
To claim the foreign earned income exclusion, you must meet all three of the following requirements:
- Your “tax home” must be in a foreign country. More about your tax home below.
- You must have foreign earned income.
- You must be one of the following:
- A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
- A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
- A U.S. citizen or a U.S. resident alien who is “physically present” in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
“Tax Home” in a Foreign Country
To qualify for the foreign earned income exclusion, your tax home must be in a foreign country throughout your period of bona fide residence or physical presence abroad (terms explained below). Your tax home is the general area of your main place of business or employment regardless of where you maintain your family home. Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual (which could be the office in your home).
You are not considered to have a tax home in a foreign country for any period in which your abode (“abode” has been variously defined as one’s home, habitation, residence, domicile, or place of dwelling) is in the United States. However, your abode is not necessarily in the United States while you are temporarily in the United States. Your abode is also not necessarily in the United States merely because you maintain a dwelling in the United States, whether or not your spouse or dependents use the dwelling.
What is a “Foreign Country?”
A foreign country includes any territory under the sovereignty of a government other than that of the United States. Residence or presence in a U.S. possession (American Samoa, Guam, Mariana Islands) does not qualify you for the foreign earned income exclusion. You may, however, qualify for an exclusion of your possession income on your U.S. return. Residents of Puerto Rico and the U.S. Virgin Islands cannot claim the foreign earned income exclusion or the foreign housing exclusion.
On March 4th, we will review the bona fide residence and physical presence tests (you must meet one) in Part 2 of this subject.
Gary A. Hensley is a 35-year veteran in accounting, auditing, and federal taxation including employment as a Revenue Agent with the IRS (2005-2011). He has been a workshop instructor on the business side of writing. Publications include: Writer’s Digest, Christian Communicator, and Writers Journal. Gary writes at: www.taxsolutionsforwriters.com.