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If you are a U.S. citizen or a resident alien, your income is subject to U.S. income tax, including any foreign income or income earned outside of the U.S. It doesn’t matter if you reside inside or outside of the U.S. when you earn this income.
Even if you don’t receive common forms like W-2s or 1099s from foreign payers, you are still required to report the income you earn abroad.
Key Takeaways
- U.S. citizens and resident aliens must report all income, including foreign income, to the IRS.
- If certain criteria are met, you may qualify to exclude some foreign-earned income from your tax return.
- The Foreign Tax Credit helps reduce tax liability for taxpayers who pay foreign income taxes.
- Report foreign income on your IRS Form 1040, just as you would report U.S.-earned income.
U.S. Citizen vs. U.S. Resident Alien
For tax purposes, if you are not a citizen of the U.S., the Internal Revenue Service (IRS) will consider you either a resident alien or a nonresident alien. You are a resident alien of the U.S. for tax purposes if you meet either the green card test or the substantial presence test for the calendar year.
IRS Publication 519, U.S. Tax Guide for Aliens, provides more information about the qualifications for being considered a U.S. resident alien for tax purposes. U.S. citizens and U.S. resident aliens must report all of their income to the U.S. government so that it may be taxed appropriately.
Total Income Includes Both Earned and Unearned Income
The IRS taxes earned income and unearned income from foreign and non-foreign sources. Here’s what falls under each category:
Earned Income:
- Wages
- Salaries
- Bonuses
- Commissions
- Tips
- Net earnings from self-employment
Unearned Income:
- Interest from savings accounts
- Bond interest
- Alimony
- Dividends from stock
How to Report Foreign Income
For detailed information about the various types of earned and unearned income, please see Publication 17, Your Federal Income Tax—For Individuals.
If you are a U.S. citizen or U.S. resident alien, you report your foreign income on your tax return, where you report your U.S. income. That is, on line 1 of IRS Form 1040. For interest, dividend, or rental property income, use the corresponding schedules (Schedule B for interest and dividends, Schedule E for rental income, etc.).
Important
Other rules apply that could affect your eligibility for the foreign earned income exclusion. IRS Publication 54 provides more complete information regarding the eligibility of taxpayers abroad.
Form 1040 is available on the IRS website.
Foreign Earned Income Exclusion
If you live and work in a foreign country, you may be able to exclude some of your foreign-earned income from U.S. tax. This is known as the Foreign Earned Income Exclusion.
Exclusion amounts change annually, so it’s important to know where to look. The IRS publishes updates to tax inflation adjustments yearly in its news release section, generally in October.
Eligibility Requirements
To be eligible for the Foreign Earned Income Exclusion:
- You must have foreign-earned income.
- You must be either:
- A U.S. citizen who is a bona fide resident of a foreign country for an entire tax year
- A U.S. resident alien who is a citizen or national of a country with which the U.S. has an income tax treaty in effect and who is a bona fide resident of a foreign country for 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
- Your tax home must be in a foreign country.
For additional details on eligibility, refer to IRS Publication 54.
Fast Fact
Your tax home is defined as the general area of your main place of employment—where you are permanently or indefinitely engaged to work as an employee or self-employed individual—regardless of where you maintain your family home. It’s important to note that your place of residence can be different from your tax home.
Foreign Tax Credit
Although it depends on the country in which you earned the income, your foreign source of income will likely be taxed in two countries— the U.S. and the country in which it was earned. To account for this, the U.S. government offers a tax break called the Foreign Tax Credit to reduce the tax liability of certain taxpayers.
This tax credit is a non-refundable tax credit for income taxes paid to a foreign government due to foreign income tax withholdings. The foreign tax credit is available to anyone working in a foreign country or with investment income from a foreign source.
How Much Foreign Income Is Tax-Free in the U.S.?
You can exclude certain amounts of foreign income from taxes, but the amount is subject to change annually. For example, the amount increased to $130,000 for the 2025 tax year from $126,500 in 2024. You may also be able to deduct certain housing expenses incurred while living abroad.
How Does the IRS Know About Foreign Income?
The Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions in specific countries to report account information to the IRS for U.S. account holders. This enables the IRS to track unreported foreign income and investments.
What Happens If You Don’t Report Foreign Income?
Failing to report foreign income can lead to penalties, which could be a percentage of the unreported income. The IRS has programs to help lower these penalties, but it’s always better to report your foreign income accurately.
The Bottom Line
As a U.S. citizen or resident alien, you must report all your income, including any earned abroad. However, the Foreign Earned Income Exclusion allows you to exclude a portion of your foreign earnings from U.S. tax, provided you meet certain conditions. You may also benefit from the Foreign Tax Credit to reduce your U.S. tax liability if you’ve paid taxes in a foreign country.
Tax situations involving foreign income can be complex, so it’s wise to consult a tax advisor to ensure you meet your reporting requirements and take advantage of any applicable exclusions or credits.
