Earnings From Abroad and Taxes
With the every expanding global economy, many people receive
earnings from foreign entities. Unfortunately, the federal
government wants you to pay taxes on it.
Taxes on Your Earnings From Abroad
The federal government has a very simple attitude towards taxes
and earnings. If you have earnings, the feds want some of it. A
number of countries, however, take the attitude that if you earn
money in another country, they will not tax that money. In
theory, this is because you are already paying taxes in the
foreign country. This makes sense from a logical perspective,
which means the federal government does something else.
Regardless of what you do, how you do it or where you do it, the
federal government demands that all U.S. citizens pay taxes on
their worldwide income. Your income includes everything from
wages, tips, interest payments, dividends, capital gains,
pensions, royalties, rents and revenues. Put another way, there
are no loophole exceptions regarding what qualifies as income.
It is important to understand that you do not get to avoid
reporting and paying taxes on foreign income or revenues just
because you aren't issued a 1099 or W-2 form. You still have to
report it and pay.
Now, more than a few people will be tempted to...forget...they
receive foreign funds during the year. There are a few problems
with these memory lapses. First, the IRS could take a look at
your bank account and realize there is a difference between what
you reported and deposited. Second, rivals and ex-spouses have a
bad habit of reporting such memory losses to the IRS. If the IRS
ultimately finds out you've failed to report foreign income, you
could be facing tax evasion charges. Tax evasion is a criminal
charge carrying prison terms and massive penalties.
There is one key exception to the above scenario. If you live
outside of the United States and earn income, you may be able to
take up to an $80,000 deduction. Put another way, you will not
be taxed on your first $80,000 of earnings if you are living in
Japan and working for Sony. You have to meet a number of strict
and somewhat complex requirements to take advantage of this
deduction. Boiled down to the basic elements, you essentially
have to remain outside of the United States for the taxable
year.
It can be tempting to forget to report your foreign earnings and
revenues. The IRS is aware of this, so taking some memory
improvement supplements is highly recommended.