Understanding the Impact of Global Income on U.S. Tax Obligations

Today, everything and everyone can easily connect to each other from the ease of their home or office. This interconnection has brought new opportunities for many US citizens and residents to make money from overseas sources. 

This income can come from any source, such as employment, investments, or business. Therefore, it is important to understand how global income impacts US tax obligations. These obligations are very hard to understand; you should consult with an international tax accountant who can guide you through this complex process.

The US government imposes taxes on worldwide income irrespective of where it is earned. Knowing these few things can protect you from making any mistakes, which can result in heavy penalties. Read this article to learn more about how global income affects U.S. tax responsibilities.

The Scope of U.S. Worldwide Income Taxation

Usually, income that is generated outside a country is not taxed by the government, but in the US, even global income is taxed regardless of where the income has been generated. This basically means that any income that you have earned abroad as a US citizen or resident has to be reported to the IRS. 

Understanding Worldwide Income

US taxpayers have to report all types of income to the IRS, from employment income to dividends or capital gains. This global tax requirement even extends even if you are working outside the company.

Foreign Earned Income Exclusion (FEIE)

Even tho it is mandatory for you to report your income, you can get some tax relief options like FEIE. Foreign Earned Income Exclusion basically allows you to exclude a certain amount of your foreign-earned income from US taxation. This tax as of 2023 was $120,000 per person.

Foreign Tax Credit (FTC)

You can avoid getting double taxed if you qualify for Foreign Tax Credit. In this, you can get an equivalent tax reduction for the amount of taxes you have paid to the foreign government. It is important to have a carefully planned structure so that you can get maximum benefits.

The Role of Tax Treaties in Reducing Double Taxation

There are some tax treaties that have been signed between the USA and some other countries that are basically made to protect people and businesses from being taxed twice on the same income. It is important to know about these treaties so that you can utilize them to their best.

What Tax Treaties Cover

Tax treaties are an agreement that addresses issues like which country can have the right to tax someone’s income and how a business or person can avoid getting taxed twice. These treaties can help in saving a lot of money that could have gone into taxes.

How to Utilize Treaties

Taxpayers should know which tax treaty is best and applies to them. If you want to claim the benefits of these treaties, then you have to submit IRS forms like Form 8833.

Residence Status and Taxation

It is important to determine your tax residency status in a relevant treaty; this can greatly affect how much tax you need to pay the government. This is important for people who have dual-nationality status or people who spend their time out of the country.

Reporting Global Assets: FBAR and FATCA Compliance

As a US taxpayer, apart from reporting your income, you also need to report your assets if you have a lot of assets out of the US. You need to comply with this under the Foreign Bank Account Report (FBAR) and the Foreign Account Tax Compliance Act (FATCA). Not complying with these can get you some big penalties. 

FBAR Requirements

Any US taxpayer who has a foreign financial account that is more than $10,000 at any point in the year has to fill out FBAR. This report is submitted to the US Treasury Department, not the IRS. If you fail to report this, then you can get a fine, which can be more than $100,000 or 50% of the account balance.

FATCA Overview

FATCA is also an important regulatory requirement that makes it important for taxpayers to report some specific foreign assets that exceed a fixed amount threshold on Form 8938. The penalty for non-reporting under FATCA is as severe as FBAR.

Consult with an International Tax Accountant Today!

Managing the complex US tax obligation can be hard if you have a global income or have assets out of the USA. If you fail to comply with these regulations you may end up getting high penalties, so it is important for you to contact an expert who helps you to easily navigate these complex rules.