For a start, you need to remember that any income earned abroad is foreign income – it matters not whether you are working for a US company; if the money is earned abroad, it is foreign earned income. Conversely, if you are working in the US, your income is US-based, even if you are working for M&S.
The same is true if you are self-employed. If you sell goods abroad, the proceeds are foreign-earned income; similarly, if you perform a service abroad, the money you earn is categorised as foreign. However, there is an important qualification: if you are selling your own product, the source of income will be the country in which you produce it – as such, there is some room to structure your finances advantageously in this regard.
Passive Income
Many wealth management clients have more than one income stream. Not only do they earn their salary, but they also have investments, while others – particularly retirees – do not work but earn money from other sources.
Examples of “passive income” include capital gains, interest, income from rental property, dividends and pensions. It can sometimes be difficult to ascertain which income from these sources is foreign and which is US-based.
As a general rule, if the property, pension fund or asset is located outside of the US, the income is foreign, whereas if it is located in the US, it is domestic and not going to attract the greater liability. If the income is coming from a company, its status will depend on where it is incorporated; however, it is important to note that some foreign dividends may be classed as US-based if the corporation is owned, at least in part, by US shareholders.
The same is true with other types of investments, including artistic, patented, copyrighted and intellectual property investments. If these are used outside of the US, they are foreign income; if the are used inside the US, they are domestic income.
Understanding your requirements
All US taxpayers, including expats, need to understand their foreign-earned income reporting requirements.
This is the first step to effective wealth management in this regard. Only once the origin of your income has been established is it possible to look at applying beneficial tax treatments to better structure your wealth. For example, the Foreign Earned Income Exclusion may allow you to exclude a portion of your foreign-earned income, while Foreign Tax Credit can help ensure that you are not taxed twice on the same income unnecessarily.
For more information about your reporting requirements and how we may be able to help you effectively manage your wealth and retirement planning in the US, contact Blacktower today.
This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.