 Introduction
U.S. taxpayers are required to report all worldwide income, including foreign earnings, rental income, interest, and dividends. The IRS offers credits and exclusions to prevent double taxation, but failing to report foreign income can lead to severe penalties.
This guide explains how to report foreign income, claim exclusions and credits, and stay compliant with IRS regulations.
 Tax Code References for Foreign Income Reporting
- IRC § 61(a) – Requires U.S. citizens and residents to report all income, including foreign income.
- IRC § 911 – Establishes the Foreign Earned Income Exclusion (FEIE).
- IRC § 901 – Allows the Foreign Tax Credit (FTC) to reduce double taxation.
- IRC § 6038D – Requires disclosure of foreign financial assets (Form 8938).
 Relevant IRS Forms for Reporting Foreign Income
- Form 1040, Schedule 1 – Reports foreign income.
- Form 2555 – Used for Foreign Earned Income Exclusion (FEIE).
- Form 1116 – Used for Foreign Tax Credit (FTC).
- Form 8938 – Required if foreign financial assets exceed IRS thresholds.
- FinCEN Form 114 (FBAR) – Reports foreign bank accounts if balances exceed $10,000.
 Who Must Report Foreign Income?
1. U.S. Citizens and Green Card Holders
- Must report worldwide income regardless of where they live.
2. U.S. Residents with Foreign Income
- Non-citizens who qualify as tax residents must also report foreign earnings.
3. U.S. Expats Living Abroad
- Even if living abroad, U.S. expats must file a U.S. tax return.
 Step-by-Step Guide to Reporting Foreign Income on IRS Form 1040
Step 1: Determine Foreign Income Sources
- Includes wages, rental income, interest, dividends, pensions, and self-employment income earned outside the U.S.
Step 2: Report Foreign Income on Form 1040
- Earned income → Schedule 1, Line 8.
- Self-employment income → Schedule C.
- Interest & dividends → Schedule B.
Step 3: Claim the Foreign Earned Income Exclusion (FEIE) (If Applicable)
- File Form 2555 to exclude up to $126,500 (for 2024) of foreign wages.
- Must meet the Physical Presence Test (330 days abroad) or Bona Fide Residence Test.
Step 4: Claim the Foreign Tax Credit (If Applicable)
- File Form 1116 to claim a credit for foreign taxes paid on foreign income.
Step 5: Report Foreign Financial Accounts (If Required)
- File Form 8938 if foreign financial assets exceed $50,000 for single filers or $100,000 for joint filers.
- File FBAR (FinCEN Form 114) if total foreign bank balances exceed $10,000.
Step 6: File Your Tax Return
- Attach all required forms and documentation before filing.
 Foreign Tax Credits and Exclusions
1. Foreign Earned Income Exclusion (FEIE)
- Excludes up to $126,500 in 2024 from U.S. taxable income.
- Only applies to earned income (wages or self-employment income).
2. Foreign Tax Credit (FTC)
- Reduces U.S. tax liability dollar-for-dollar for foreign taxes paid.
- Can be used for investment income, rental income, and business income.
3. Foreign Housing Exclusion
- Allows additional exclusions for housing expenses incurred abroad.
 Example Scenarios for Foreign Income Taxation
Example 1: U.S. Citizen Working Abroad
- John, a U.S. citizen, earned $120,000 in Germany and paid $35,000 in German taxes.
- He filed Form 2555 and excluded $120,000 from U.S. taxation under FEIE.
Example 2: Foreign Tax Credit for Investment Income
- Lisa, a U.S. taxpayer, earned $15,000 in foreign dividends and paid $3,000 in foreign taxes.
- She filed Form 1116 to claim a $3,000 Foreign Tax Credit.
Example 3: Self-Employed U.S. Expat
- Mark, a freelance consultant in Canada, earned $95,000 and paid $20,000 in Canadian taxes.
- He claimed FEIE on Form 2555 and also deducted self-employment taxes.
 Common Mistakes to Avoid
- Failing to report foreign income – The IRS receives foreign income reports from foreign governments.
- Not filing FBAR for foreign bank accounts – Severe penalties apply for non-compliance.
- Claiming both FEIE and FTC on the same income – You cannot use both exclusions on the same earnings.
 IRS Compliance Requirements
- Report all foreign income, even if already taxed abroad.
- File FBAR (FinCEN Form 114) for foreign accounts over $10,000.
- File Form 8938 if foreign assets exceed IRS thresholds.
 Conclusion
U.S. taxpayers must report all foreign income, but various exclusions and credits help reduce double taxation. Staying compliant with IRS rules ensures legal tax savings and prevents costly penalties.
For expert tax guidance on foreign income reporting, consult Anshul Goyal, CPA EA FCA, a Certified Public Accountant and IRS compliance expert.
 FAQs
1. Do I have to report foreign income if I already paid foreign taxes?
Yes, but you can claim the Foreign Tax Credit (FTC) or Foreign Earned Income Exclusion (FEIE).
2. What happens if I don’t report my foreign income?
The IRS may impose penalties, audits, and back taxes.
3. What is the Foreign Earned Income Exclusion (FEIE)?
FEIE excludes up to $126,500 in foreign wages from U.S. taxation in 2024.
4. Who must file FBAR?
Anyone with foreign bank accounts exceeding $10,000 at any time during the year.
5. Can I use both FEIE and Foreign Tax Credit?
You cannot use both for the same income, but you may apply them separately to different income sources.
 About Our CPA
Anshul Goyal, CPA EA FCA, is a Certified Public Accountant and IRS compliance expert specializing in foreign income reporting, expat tax compliance, and international tax strategies.
For personalized tax assistance, schedule a consultation with Anshul Goyal, CPA EA FCA today.