The United States has a complex tax system, and that system becomes even more complicated when you factor in foreign investment income. If you’re a U.S. citizen or resident alien with foreign investment income, you’ll need to know how to handle the taxes on that income.
This guide will cover the basics of taxes on foreign investment income, including the source of the income, the character of the income, the U.S. recipient’s filing status, the foreign country in which the income was earned, the tax rate on the income, the foreign earned income exclusion, the foreign tax credit, filing requirements, and paying taxes on foreign investment income.
The source of the income
The first thing you need to know when it comes to taxes on foreign investment income is the source of that income. There are two possible sources of foreign investment income: passive income and active income. Passive income is income that comes from sources that are not actively managed by the taxpayer. This includes things like interest, dividends, and capital gains. Active income, on the other hand, is income that comes from active involvement in a business or investment. This includes things like wages, salaries, and tips.
The character of the income
The character of the income is the determination you need next. There are two possible characteristics for income: ordinary income and capital gains. Ordinary income is income that is taxed at the taxpayer’s marginal tax rate. This includes things like wages, salaries, and tips. Capital gains, on the other hand, are taxed at a lower rate. This includes things like interest, dividends, and capital gains.
The U.S. recipient’s filing status
After determining the character of the income, determine your U.S. filing status. There are four possible filing statuses: single, married filing jointly, married filing separately, and head of household. Single: If you are single, you will file your taxes as an individual. Married filing jointly: If you are married and file your taxes jointly with your spouse, you will file your taxes as a married couple. Married filing separately: If you are married and file your taxes separately from your spouse, you will file your taxes as a single taxpayer. Head of household: If you are head of household, you will file your taxes as an individual.
The foreign country in which the income was earned
Next is determining the country in which the income was earned. There are two possible scenarios here: the income was earned in a country with a tax treaty with the United States, or the income was earned in a country without a tax treaty with the United States. If the income was earned in a country with a tax treaty with the United States, the tax rate on the income will be reduced. If the income was earned in a country without a tax treaty with the United States, the tax rate on the income will be the same as the marginal tax rate.
The tax rate on the income
The next thing you need to know about taxes on foreign investment income is the tax rate on that income. The tax rate on foreign investment income depends on the source of the income, the character of the income, the U.S. recipient’s filing status, the foreign country in which the income was earned, and the tax treaty between the United States and the foreign country.
The foreign-earned income exclusion
What are the exclusions on the foreign-earned income tax? The foreign-earned income exclusion allows taxpayers to exclude a certain amount of income from their taxes. The amount of the exclusion depends on the taxpayer’s filing status, the country in which the income was earned, and the taxpayer’s tax treaty status.
The foreign tax credit
Next, determine the foreign tax credit. The foreign tax credit allows taxpayers to credit a certain amount of taxes paid to a foreign government against their U.S. tax liability. The amount of the credit depends on the taxpayer’s tax liability, the foreign taxes paid, and the tax treaty status.
Filing requirements
Finally, determine the filing requirements. Taxpayers with foreign investment income are required to file a Tax Return Transcript and a Foreign Investment Questionnaire with the IRS. 10. Paying taxes on foreign investment income: The final thing you need to know about taxes on foreign investment income is how to pay taxes on that income. Taxes on foreign investment income are due on the date the income is received. Taxpayers can pay taxes on foreign investment income using a credit card, electronic funds transfer, or check.
If you want to learn more about handling taxes on foreign income, visit our blog page to read more or our contact page to connect with a tax specialist.
