What Is Worldwide Income and How Do You Report It?

The United States employs a citizenship-based taxation system, which means its citizens and residents are taxed on their income from all sources, both within and outside the country. This concept is known as worldwide income and encompasses every type of revenue an individual generates, regardless of the geographic location where it was earned. This comprehensive reporting obligation requires taxpayers to report all earnings from employment, investments, and other foreign financial activities to the Internal Revenue Service (IRS) to determine their U.S. tax liability.

Determining Who is Subject to Worldwide Income Taxation

The obligation to report worldwide income to the IRS extends to three groups. The first is U.S. citizens, a requirement that applies regardless of where a citizen lives. The second group is Lawful Permanent Residents, or Green Card holders, who must report all income from foreign and domestic sources as long as their status is maintained.

The third category consists of individuals classified as resident aliens for tax purposes under the Substantial Presence Test. This test is a formula based on the number of days a person is physically present in the United States over a three-year period. To meet the test, an individual must be present in the U.S. for at least 31 days in the current year and a total of 183 days over the last three years.

The 183-day total is calculated by counting all days of presence in the current year, one-third of the days from the prior year, and one-sixth of the days from the second prior year. For instance, an individual present for 120 days in the current year, 150 days last year, and 120 days the year before would have a total of 190 days (120 + 50 + 20), meeting the test.

Identifying Reportable Foreign Income and Assets

A wide array of foreign-sourced income must be reported on a U.S. tax return, including both earned income, such as wages and self-employment earnings, and unearned income. Reportable unearned income from foreign sources includes interest, dividends, rental income from foreign properties, royalties, and pension payments.

Beyond income, U.S. persons must also report certain foreign financial assets. The first requirement is the Report of Foreign Bank and Financial Accounts (FBAR), filed using FinCEN Form 114. This report is required if the aggregate value of all foreign financial accounts exceeds $10,000 at any point during the calendar year. A foreign financial account includes bank accounts, brokerage accounts, and mutual funds held at a financial institution outside the United States. The reporting obligation is triggered by having a financial interest in or signature authority over such accounts.

The second asset reporting requirement falls under the Foreign Account Tax Compliance Act (FATCA) and is completed using Form 8938, Statement of Specified Foreign Financial Assets. The reporting thresholds for Form 8938 are higher and vary. For a single individual in the U.S., the threshold is met if specified foreign assets are worth more than $50,000 on the last day of the tax year or more than $75,000 at any time during the year. For a single taxpayer living abroad, these thresholds are over $200,000 on the last day of the year or over $300,000 at any time during the year.

Specified foreign financial assets is a broad category that includes financial accounts and other foreign assets held for investment, such as stock or securities issued by a non-U.S. person, a financial instrument held for investment with a non-U.S. issuer, and any interest in a foreign entity. Unlike the FBAR, Form 8938 is filed directly with the IRS as an attachment to the annual income tax return.

Mechanisms to Reduce Double Taxation

To mitigate double taxation, where income is taxed by both a foreign country and the United States, taxpayers can use two mechanisms. The first is the Foreign Earned Income Exclusion (FEIE), which allows qualifying individuals to exclude a certain amount of their foreign earned income from U.S. taxable income. For the 2025 tax year, the maximum exclusion is $130,000 and applies only to earned income, not passive income like interest or dividends.

To qualify for the FEIE, a taxpayer 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 a U.S. citizen to be a resident of a foreign country for an uninterrupted period that includes an entire tax year. The Physical Presence Test requires a U.S. citizen or resident alien to be physically present in a foreign country for at least 330 full days during any consecutive 12-month period.

The second mechanism is the Foreign Tax Credit (FTC), which allows taxpayers to reduce their U.S. income tax liability on a dollar-for-dollar basis for income taxes already paid to a foreign country. The FTC can be applied to both earned and passive income. The FEIE is an exclusion that removes a portion of foreign earned income from being taxed by the U.S. altogether. In contrast, the FTC is a credit that does not reduce taxable income but instead directly reduces the amount of U.S. tax owed. A taxpayer may be able to use both, for instance, by excluding foreign earned income up to the FEIE limit and then claiming a foreign tax credit on the taxes paid on any remaining income.

Required Information and Forms for Reporting

Properly reporting worldwide income requires specific documentation for several forms.

Foreign Earned Income Exclusion

To claim the FEIE, you must file Form 2555, Foreign Earned Income. This requires meticulous record-keeping to prove you meet either the Bona Fide Residence or Physical Presence Test. You will need:

• The exact dates of your travel into and out of the United States
• Your foreign address and information about your tax home
• Details about your employer, including their name and address
• Records of your foreign earned income, such as pay stubs or earnings statements

Foreign Tax Credit

For the FTC, you must complete Form 1116, Foreign Tax Credit. The primary information needed is proof of foreign income taxes paid or accrued. You will need:

• Official tax receipts or statements from the foreign tax authority
• Records to categorize your foreign source income by type
• The dates the foreign taxes were paid
• Records to convert these amounts into U.S. dollars using an acceptable exchange rate

FATCA Reporting

To comply with FATCA, you may need to file Form 8938, Statement of Specified Foreign Financial Assets. You must gather detailed information on each specified foreign asset, including:

• The name and address of the financial institution where an account is held
• The account number
• The maximum value of the asset in U.S. dollars during the tax year
• Information to determine the value of other assets like foreign stock or partnership interests

FBAR Reporting

The Report of Foreign Bank and Financial Accounts (FBAR) is filed using FinCEN Form 114. This form is filed with the Financial Crimes Enforcement Network (FinCEN), not the IRS. You will need:

• The name and address of each foreign financial institution
• The type of account and the account number
• The maximum value of each account during the calendar year
• The name and taxpayer identification number of any other owner for joint accounts

The Reporting and Filing Process

The submission process for worldwide income involves multiple forms with different filing requirements. Forms related to tax calculations, such as Form 2555 for the FEIE and Form 1116 for the FTC, are filed as attachments to your annual U.S. income tax return, Form 1040. Form 8938 for reporting specified foreign financial assets is also included with your Form 1040.

In contrast, the FBAR (FinCEN Form 114) is not part of your tax return. It must be filed separately and electronically with the Financial Crimes Enforcement Network through its BSA E-Filing System.

Taxpayers living abroad have different filing deadlines. While the standard U.S. tax filing deadline is April 15, U.S. citizens and residents overseas receive an automatic two-month extension to file, making their deadline June 15. This is an extension to file, not to pay; any tax owed is still due by the April deadline to avoid interest. The FBAR deadline is also April 15 but includes an automatic extension to October 15.