Archives
Contribute
| Let's Talk Taxes – Foreign Income |
Asha Dixit
10/23/2012
“For anyone with hidden offshore assets, the IRS wants to send a clear message. There is still time — although the clock is ticking — to come in and get right with the government. People with unreported offshore income should immediately contact their tax professional.†IRS Commissioner Doug Schulman’s press remarks on UBS Aug 19, 2009.
All foreign income whether from foreign interest, dividends, capital gains or other sources needs to be included in your United States (US) income tax return. Though this seems simple enough, many US taxpayers are absolutely confused about foreign income and its inclusion in their tax returns.
“I paid taxes overseas, why do I need to pay taxes again?†This misconception that since foreign income has been taxed already and therefore should not be included, often results in inadvertent exclusion of income. Unfortunately, US tax laws require every taxpayer to report their “worldwide income†on their tax return. If the foreign country where the income was earned requires taxes to be paid, then you can claim Foreign Tax Credit (FTC). But you must include the income on your US tax return!
For example in 2012 Mr. A has bank interest from Bank XYZ of $10,000 on which foreign taxes have been deducted at source of $3,000. Mr. A has to include the $10,000 in his Schedule B of Form 1040 for 2012. He can show the foreign taxes paid of $3,000 on his Form 1116 and calculate the appropriate FTC.
Many US taxpayers are misled by the term “tax free†and consequently invest overseas thinking that they do not need to pay US taxes. However, tax free income from a foreign country does not necessarily translate into tax free income for US.
Mr. B has tax free bond interest of $5,000. Mr. B thinks that since it’s tax free income he does not need to include it in his US tax return. Is he right? Unfortunately, no. Though Mr. B is fortunate to have tax free interest income which is tax free only in the foreign country where the income was earned. However, for purposes of his US tax return, it is taxable income. Therefore, Mr. B must include it on his Schedule B along with other interest income. Since no foreign taxes were paid, Mr. B will not get any FTC.
Accrued interest, particularly on fixed deposits, is another frequently overlooked source of income. This is an easy enough mistake since foreign banks may not include this income in their annual interest reporting depending on whether the country in which this account is held adheres to accrued interest concept. Therefore pay close attention to fixed deposits, certificates of deposits and other such accounts with accrued interest income.
Since foreign income can have significant impact on their US return filings, US taxpayers with foreign income should carefully scrutinize and understand the tax implications of various investments currently in their portfolio or need to consult with their tax advisor before making new purchases.
Asha Dixit, CPA, MBA, MS is a partner with Shah, Dixit & Associates P.C. in Burlington, MA. For further information, contact Ms. Dixit at asha@shahdixit.com
|
You may also access this article through our web-site http://www.lokvani.com/
