How do I report foreign income?

What foreign income is taxable on my U.S. return?  If you are a U.S. citizen or resident, you are required to report your world-wide income on your tax return.  This means that you must not only report income you receive from U.S. sources, but you must also report income you receive from foreign sources.

Where do I report the foreign income on my return?  Generally, the same place you report your U.S. income of the same type.  Earned income (wages) are reported on line 7 of Form 1040; interest income is reported on Schedule B, so are dividends; income from rental properties are reported on Schedule E, etc.

Are there any special rules?  Yes. As with all matters associated with taxes, there are special rules.  However, we cover the most common of those special rules below.  Read on!

Since it is likely your foreign source income will be taxed by both the U.S. and a foreign country, there is a special tax rule called the Foreign Tax Credit. The purpose of the foreign tax credit is to make sure you are only taxed once on the foreign source income, at the higher of the foreign or U.S. income tax rates on the income.

These rules can get complicated, but don't worry!  TurboTax will ask you questions about your foreign taxes, figure out how much credit you are entitled to, and fill in all the right forms for you.

If you've already gone through the step-by-step interview and want to jump directly to the entry screen for the foreign tax credit, follow these directions.

1. Select the Federal Taxes tab (the Personal tab in the Home & Business edition).
2. Select the Deductions & Credits subtab.
3. Scroll down the Deductions & Credits screen until you see the Estimates and Other Taxes Paid group.
4. Click on the Start/Update button to the right of the Foreign Taxes category.  
5. Follow the prompts.

If you meet certain tests related to the length and nature of your stay in a foreign country, you may qualify to exclude some of your foreign earned income from your return, and you may also be able to exclude or deduct some of your reimbursed housing costs. You cannot exclude or deduct more than your foreign earned income for the year.  For 2012, the maximum foreign earned income exclusion is $95,100.

Like the foreign tax credit, the rules for the foreign earned income exclusion can be complex, but don't worry! TurboTax again will ask you questions about your foreign earned income, figure out if you meet the various tests required, and fill in all the right forms for you.

If you've already gone through the step-by-step interview and want to jump directly to the entry screen for the foreign earned income exclusion, follow these directions.

1. Select the Federal Taxes tab (the Personal tab in the Home & Business edition).
2. Select the Wages & Income subtab.
3. Scroll down the Wages & Income screen until you see the Less Common Income group.
4. Click on the Start/Update button to the right of the Foreign Earned Income and Exclusions category.  
5. Follow the prompts.