As a U.S. citizen or subject, such as green card holder, you are liable for tax on income earned abroad.
As a side note, the U.S. is the only country that taxes its citizens or subjects on worldwide income. For an example on how the U.S. government wants its due from overseas earnings, let’s say that you are a U.K. citizen but are in the U.S. on a green card and you earn income in the U.K. You must claim the income from the U.K. in the U.S. and pay any tax due. The U.K., though, like many countries, has a tax treaty with the U.S.
So, using the same example as before, if the U.K. income is taxed in the U.K., the income is claimed here in the U.S., and the amount of tax paid in U.K. is given a foreign tax credit, which is a dollar-for-dollar credit, in the U.S. If there is a difference between the taxes owed here and the taxes paid in the U.K., then the difference is taxed in the U.S.
For example, let’s say that your income in the U.K. is 20 pounds, and the tax paid in the U.K. is 5 pounds. Let’s say after the conversion rate the income is $30, and the tax paid is $10, you would claim the $30 as income in the U.S., and get a tax credit of $10. However, let’s say that the tax in the U.S. on the $30 is $20, then after the $10 tax credit, you would owe $10 in U.S. tax. Usually the tax paid in the other country zeroes out the tax in the U.S., but not always.
If you are a U.S. citizen and you work and live in Spain, and meet certain requirements, you have to claim the Spanish income in the U.S. However, in 2018 there is a foreign earned income exclusion of $104,100, meaning that the first $104,100 of income earned in Spain is excluded from U.S. income. If you made more than the earned income exclusion, the amount is taxable in the U.S.
The question that I’m always asked is, “How does the IRS know about foreign income?”
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About Craig W. Smalley, EA
Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as representation before the IRS regarding negotiations, audits, and appeals. In his many years of practice, he has been exposed to a variety of businesses and has an excellent knowledge of most industries. He is the CEO and co-founder of CWSEAPA PLLC and Tax Crisis Center LLC; both business have locations in Florida, Delaware, and Nevada. Craig is the current Google small business accounting advisor for the Google Small Business Community. He is a contributor to AccountingWEB and Accounting Today, and has had 12 books published on various topics in taxation. His articles have also been featured in the Chicago Tribune, New York Times, Yahoo Finance, Nasdaq, and several other newspapers, periodicals, and magazines. He has been interviewed and been a featured guest on many radio shows and podcasts. Finally, he is the co-host of Tax Avoidance is Legal, which is a nationally broadcast weekly Internet radio show.