If you are a U.S. Citizen or a U.S. resident alien, your worldwide income generally is subject to U.S. income tax, regardless of whether you live and work in the United States or a foreign country. With this obligation comes the potential for double taxation. The worldwide income of taxpayers, however it is derived, is called gross income. You can receive income in the form of money, property, or services. You may receive money or property that is either taxable or nontaxable. 26 U.S. Code § 61 of the Internal Revenue Code provides that gross income is all income from whatever source derived unless it is otherwise stated elsewhere as being nontaxable. Therefore, It is important to keep records to identify the taxpayer’s source and taxability of the money or property.
Earned and Unearned Income
There are two types of gross income: earned income and unearned income. The distinction is important because they are treated differently for tax purposes. Earned income is received for services performed, such as wages, tips, and commissions. Unearned income is any income that cannot be considered “earned”. It includes money received for the investment of money or other property, such as interest, dividends, rents, and royalties. It also includes pensions, alimony, unemployment compensation, and other income that is not from performing services.
If you are a U.S citizen or a U.S. resident alien, you must report income from sources outside the United States (foreign income) on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form w-2, Wage and Tax Statement, or Form 1099 from the foreign payer. This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties). If you reside outside the Unites States, you may be able to exclude part or all of your foreign source earned income.
Foreign Earned Income Exclusion Eligibility
To be eligible for the foreign income exclusion tax benefits the taxpayer must have foreign earned income and meet all of the following requirement.
- U.S. citizen or U.S.resident alien
- Tax home in a foreign country
- Meet the bona fide residence test of physical presence test
The IRS provides relief from double taxation in the form of (1) the foreign earned income exclusion and housing exclusion or deduction on Form 2555, Foreign Earned Income, and (2) the foreign tax credit on Form 1116, Foreign Tax Credit or deduction on Schedule A, Itemized Deductions.
Taxpayers who qualify may exclude up to $99,200 of foreign earned income in 2014. If taxpayer and spouse both qualify, each spouse can exclude up to $99,200 of their own earned income, for a total of $198,400 on their tax return.
For details, see Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad
Sources of Income
Examples of some items of income both included and excluded:
Included in Gross Income
- Compensation for services, including fees, commissions, fringe benefits and similar items.
- Gross income derived from business
- Gains derived from dealings in property
- Rents, Royalties
- Alimony and separate maintenance payments
- Annuities, Income from life insurance and endowment contracts
- Income from discharge of indebtedness
- Distributive share of partnership income
- Income in respect of a decedent, income from interest in a trust or estate
Specifically Excluded from Gross Income
- Life insurance payments, if paid by reason of the death of the insured
- Gifts and inheritances
- Interest on state and local bonds
- Compensation for personal injuries
- Less than 15 days rental of the taxpayer’s dwelling unit
- Return of capital
- Child support. Property settlements
- Meals or lodging furnished for the convenience of the employer
- A qualified Roth IRA distribution. Certain social security and railroad retirement benefits
- Exclusions from income from discharge of indebtedness
- Certain partnership distributions
- Federal income tax refunds
Income that is taxable must be reported on your return and is subject to tax. Income that is nontaxable may have to be shown on your return but is not taxable.
For more information, see Publication 525, Taxable and Nontaxable income