If You Make Money Overseas Is It Taxable?

The United States tax system operates on a principle of worldwide income taxation. U.S. citizens and resident aliens are generally subject to U.S. tax on their income, regardless of where it is earned, paid, or held. This can create complexities for individuals earning money overseas, as they may also be taxed in the foreign country where the income is generated. However, U.S. tax law provides mechanisms to help prevent or alleviate the burden of paying taxes twice on the same income.

US Taxation of Worldwide Income

U.S. citizens and resident aliens are taxed on their worldwide income. This means all income, regardless of its source or location, must be reported to the Internal Revenue Service (IRS).

For tax purposes, a “U.S. citizen” includes individuals born in the U.S. or naturalized. A “resident alien” is generally a foreign national who meets either the “green card test” (lawful permanent resident) or the “substantial presence test.” The substantial presence test requires physical presence in the U.S. for a specified number of days over a three-year period.

This worldwide taxation applies whether income is earned, paid, or held in the U.S. or a foreign country. This universal tax liability is the baseline before any exclusions, deductions, or credits are applied to mitigate potential double taxation.

Classifying Foreign Income

The IRS categorizes different types of income earned overseas, which dictates applicable tax treatment and potential benefits.

Foreign earned income refers to wages, salaries, professional fees, or other compensation for personal services performed in a foreign country. This includes income from employment or self-employment activities conducted abroad. This income type is distinct because specific tax benefits, like the Foreign Earned Income Exclusion, apply only to it.

Foreign business income represents profits generated from a sole proprietorship, partnership, or S corporation operating outside the U.S. This income is typically sourced where business activities are performed. Foreign passive income includes earnings from investments such as interest, dividends, royalties, and rental income from properties located overseas.

Capital gains from the sale of property located or held outside the U.S. are considered foreign capital gains. Foreign pension or retirement income is generally taxable in the U.S., similar to domestic pensions.

Strategies to Prevent Double Taxation

U.S. taxpayers can use several mechanisms to reduce or eliminate the impact of double taxation on foreign income. These include the Foreign Earned Income Exclusion (FEIE), the Foreign Tax Credit (FTC), and provisions within tax treaties.

The Foreign Earned Income Exclusion allows eligible individuals to exclude a certain amount of their foreign earned income from U.S. taxable income. To qualify, an individual must have a tax home in a foreign country and meet either the bona fide residence test or the physical presence test. The bona fide residence test requires being a bona fide resident of a foreign country for an uninterrupted period including an entire tax year. The physical presence test requires being physically present in a foreign country for at least 330 full days during any 12-month period. For the 2025 tax year, the maximum exclusion amount is $130,000, adjusted annually for inflation. If both spouses qualify, each can claim the exclusion on their separate foreign earned income. A related benefit is the Foreign Housing Exclusion or Deduction, which allows a qualifying individual to exclude or deduct amounts paid for reasonable housing expenses in a foreign country above a base housing amount. This exclusion aims to cover the higher cost of living experienced overseas.

The Foreign Tax Credit provides a dollar-for-dollar credit against U.S. tax liability for income taxes paid or accrued to a foreign country. To qualify, the foreign tax must be an income tax, legally owed, and paid or accrued to a foreign country. The credit amount is generally limited to the U.S. tax attributable to the foreign income, meaning foreign taxes cannot offset U.S. tax on U.S. source income. Any unused foreign tax credits can typically be carried back one year and carried forward for up to ten years. The FTC can be particularly beneficial when foreign tax rates are higher than U.S. rates or for types of income, such as passive income, that do not qualify for the FEIE. You cannot apply both the FEIE and the FTC to the same income.

The U.S. has income tax treaties with many countries. These treaties are international agreements designed to prevent double taxation by clarifying which country has the right to tax specific types of income. Treaties can modify tax rules and provide additional relief or exemptions, sometimes impacting the taxation of pensions or other income types. Understanding the relevant tax treaty for your situation can be an important step in minimizing your overall tax burden.

Reporting Foreign Financial Assets and Accounts

U.S. persons with overseas financial interests have specific information reporting obligations. These requirements are separate from income tax calculations but are important for compliance and carry significant penalties for non-compliance.

The Report of Foreign Bank and Financial Accounts (FBAR), FinCEN Form 114, is a key requirement. U.S. persons with a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year. This includes bank accounts, brokerage accounts, and mutual funds. The annual due date for the FBAR is April 15, with an automatic extension to October 15.

The Foreign Account Tax Compliance Act (FATCA) introduced Form 8938, Statement of Specified Foreign Financial Assets, filed with your annual income tax return (Form 1040). Form 8938 requires U.S. individuals to report specified foreign financial assets if their value exceeds certain thresholds. These assets include a broader range than FBAR, such as foreign bank accounts, investment accounts, foreign stocks, and interests in foreign entities. Reporting thresholds for Form 8938 vary based on filing status and residency:
For individuals living in the U.S.: Generally $50,000 on the last day of the tax year or $75,000 at any time during the year for single filers, with higher thresholds for married individuals filing jointly.
For those living abroad: Typically $200,000 on the last day of the tax year or $300,000 at any time during the year for single filers, and $400,000/$600,000 for married filing jointly.

FBAR and Form 8938 are separate reporting requirements. Meeting the filing threshold for one does not negate the need to file the other if their respective thresholds are also met.

Preparing Your Tax Return with Foreign Income

Integrating foreign income and related tax benefits into your U.S. tax return requires gathering financial documents, including statements detailing foreign income and receipts for foreign tax payments. All foreign income and expenses must be reported in U.S. dollars.

To claim the Foreign Earned Income Exclusion, complete Form 2555, Foreign Earned Income. On this form, you will provide general information, such as your foreign address and occupation. You must then complete either the Bona Fide Residence Test or the Physical Presence Test to establish eligibility. You will calculate your foreign earned income exclusion and any foreign housing exclusion or deduction. The resulting excluded amount from Form 2555 is then reported on your Form 1040, reducing your taxable income.

If claiming the Foreign Tax Credit, use Form 1116, Foreign Tax Credit (Individual, Estate, or Trust). On Form 1116, you will categorize your foreign income, list foreign income taxes paid or accrued, and calculate the allowable credit. The form helps ensure the credit does not exceed the U.S. tax liability on your foreign source income, adhering to the credit limitation rules. The final credit amount from Form 1116 is carried over to your Form 1040, directly offsetting your U.S. tax liability. Remember, you cannot claim both the FEIE and the FTC on the same income.

Once Form 2555 and/or Form 1116 are completed, attach them to your annual Form 1040. While the general tax filing deadline is April 15, U.S. citizens and resident aliens residing abroad typically receive an automatic two-month extension to June 15. Further extensions can be requested. It is advisable to maintain thorough records of all foreign income, expenses, and tax payments to support the information reported on your tax return.