International Tax Issues and the IRS

International Tax Issues and the IRS Related Information:

The IRS has certain international tax laws that affect American citizens and American companies that earn international income. Here’s a brief look at some of the international tax issues that affect US citizens.

The IRS and International Income

A US person (US citizen, corporation, business, resident alien) has to pay income taxes to the IRS on their total worldwide income and not just on income earned in the United States. As a person from the US, you have to pay income taxes on any foreign or international income that you earn. For instance, if you are an American citizen and earn any income from international sources, you are required to disclose your foreign income on your tax return. As an American company, you are required to pay corporate income taxes on US earned income as well as any income from international sources or businesses.

If you earn income in international currency, then you are required to convert that currency into US dollars and then report your international income in US dollars. An individual getting regular payments in international currency is required to use an average exchange rate of the entire yearly rates, whereas if you earn income in international currency only occasionally, you are required to convert the currency using the spot exchange rate as on that day.

International Income Of Non-Resident US Citizens

If you are an American citizen living and working abroad, you are still required to pay income taxes to the IRS, even if you are paying any local taxes. The IRS mandates taxes on your worldwide income, regardless of where you are living. But American citizens living and working abroad can qualify for certain exemptions on their foreign earned income.

As a US taxpayer living abroad, you can qualify for the foreign earned income exclusion if you fulfill the following criteria:

• You must have a tax home in the country where you live and work. A tax home refers to any place of business, office, or business post in the resident country. The basis of this qualifying criterion is that the IRS wants to know for certain that you have in fact relocated abroad and don’t just travel abroad for work.
• You must have a permanent residence in the foreign country for at least one full tax year, and if not, then you should have lived abroad and worked for your income for at least 330 days in the year.

If you can show that you have met the above two criteria, then you can claim an exemption on your foreign earned income up to a maximum of $80,000.

If you have paid any taxes in the foreign country, or your international employer has withheld any taxes, then the IRS international tax laws do not allow you to show such foreign taxes as withholdings on your US tax return. Under such circumstances, you may be entitled to receive foreign tax credits or international tax deductions; the amount of which will depend on the amount of foreign taxes paid and also the country in which they are paid.

If you are an American citizen working abroad, you may be entitled to claim some expenses for living abroad. As an employee, you can claim a portion of your international income as an exemption for living expenses. Self employed individuals can show foreign housing costs as an itemized deduction and if you own a home abroad, you can show some of your living costs as expenses, and claim these as deductions from your international income.

To know the full extent of international laws affecting you as an American individual and as a company, you should consult with a tax attorney competent in international law issues.