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Reporting foreign income


Dear Tax Talk,
I am a U.S. citizen, married to a Peruvian woman, and as of May 2003 have established residency in Peru. I am working as a teacher here and I make a very small amount of money, but enough for us to live pretty well here. I know I need to file a tax return in the United States, but I have no income statement or tax statement to use to make such a filing. I know that the standard deductions will negate what income I do have, but I don't know how to declare that income in a way that will be acceptable to the Internal Revenue Service. I appreciate any help you can provide as it is driving me crazy how to do this correctly so the IRS doesn't come after me later. -- John

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Dear John,
As you know, U.S. citizens who reside abroad are required to file a U.S. tax return on their worldwide income. Of course, this becomes tricky when the country you live in doesn't report the income on a Form W-2 or 1099.

However, whether or not you live in a foreign country, you need to report all your income on your tax return even if you do not get a reporting statement such as a W-2. If you're an employee, report the amount that you received on Line 7 of Form 1040 for wages. If you're self-employed, report your earnings on Schedule C. If you're self-employed, you'll also need to pay self-employment tax on Schedule SE. If you're an employee, self-employment tax does not apply to your wages.

Since you're married, you'll need to file "married filing separately" (unless you elect to treat your spouse as a resident alien), which cuts your standard deduction in half. You can claim an exemption for your Peruvian spouse, but she'll either need a Social Security number, if she's eligible to receive one, or apply for an Individual Tax Identification Number on Form W-7 until she becomes eligible for a Social Security number. An ITIN can take six to eight weeks to receive, so apply early and take an extension of time to file if you need the deduction.

You can elect to treat your spouse as a resident alien and file a joint return. You might want to consider this if you need the higher standard deduction. Also, you can elect to exclude your foreign earned income if the standard deduction and personal exemptions are not sufficient to eliminate your tax. IRS Publication 54 is a helpful starting point for citizens living abroad.

-- Posted: March 31, 2004




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