FAQs - Income
How do I determine the source (foreign or U.S.) of my income?
The source of earned income and employee benefits generally depends on the physical location of the taxpayer when earning the income. If earned in a foreign country, it is considered foreign source.
The source of unearned income generally depends on the location of the payor or the property that generates the income. As a result, dividends and interest received from the U.S. government or domestic corporations is considered a U.S. source.
What part of my compensation does the IRS consider taxable income?
In general, the IRS considers mostly all forms of compensation worldwide as income. This includes:
- Salaries and commissions
- Education, travel, housing and other allowances
Other cash and benefits received for personal service
I recently sold my foreign primary residence. Do I owe income tax to the U.S. from this sale?
The rules for reporting the sale of your primary residence are generally the same as if the property was located in the United States. The IRS allows an exclusion of $250,000 ($500,000 if filing jointly) if you used and owned the property as your principal residence for two of the past five years. In general, taxpayers must not have excluded the gain from the sale of a former principal residence within the two-year period ending on the date of the sale. If the future sale of your home is due to a change in employment, health or unforeseen circumstances, you may qualify for a reduced exclusion, even if you fail to meet the ownership and use tests, or you used the exclusion within the two-year period ending on the date of the sale. There’s no limit to the number of times you can claim the exclusion.
What is Modified Adjusted Gross Income (MAGI)?
Modified Adjusted Gross Income is your Adjusted Gross Income (AGI) plus the addition of certain deductions. Oftentimes, your AGI and MAGI can be identical. The following deductions (as applicable) are added back to calculate MAGI:
- Student loan interest
- One-half of self-employment tax
- Qualified tuition expenses
- Tuition and fees deduction
- Passive loss or passive income
- IRA contributions and taxable social security payments
- The exclusion for income from U.S. savings bonds
- The exclusion under 137 for adoption expenses
- Rental losses
- Any overall loss from a publicly traded partnership
My foreign bank account earns a small amount of interest. Do I have to report this on my U.S. tax return?
Yes, you should report all income received, irregardless of the source and amount. The United States taxes its residents on their worldwide income.
I own a foreign rental property that operates at a loss. Do I have to report this on my U.S. tax return?
Yes, you will most likely need to include Schedule E with your tax return if you’ve received rental income, even if there is a net loss. Losses from rental properties may help reduce your overall tax liability and must be claimed on your tax return.
What is the basis of property that I received as a gift?
To figure out the basis of property you receive as a gift, you must know three amounts:
- The adjusted cost basis to the donor just before the donor made the gift to you
- The fair market value (FMV) at the time the donor made the gift
- The amount of any gift tax paid on Form 709
If the FMV of the property at the time of the gift is less than the donor’s adjusted basis, your adjusted basis depends on whether you have a gain or loss when you dispose of the property.
Your basis for figuring a gain is the same as the donor’s adjusted basis, plus or minus any required adjustments to the basis while you held the property.
Your basis for figuring a loss is the FMV of the property when you received the gift, plus or minus any required adjustments to the basis while you held the property.
If you use the donor’s adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither a gain nor loss on the sale or disposition of the property.
If the FMV is equal to or greater than the donor’s adjusted basis, your basis is the donor’s adjusted basis at the time you received the gift.
What is the basis of property that I inherited?
The basis of property inherited from a decedent is generally one of the following:
- The fair market value (FMV) of the property on the date of the decedent’s death
The FMV of the property on the alternate valuation date if the executor of the estate chooses to use the alternate valuation