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Dear Tax Talk,
My daughter lives overseas where she works as a teacher and gets paid and taxed profusely by that government. Does she need to file a U.S. tax return because she is a U.S. citizen working and living abroad?
Yes, your daughter absolutely needs to file a U.S. tax return.
All U.S. citizens are required to report their global income, regardless of where the income is earned. This means that all income earned, whether from a U.S. source or not, is included on her Form 1040 tax return.
However, do not be dismayed. Provisions are in place that will prevent your daughter from being taxed twice.
Two reasons a U.S. citizen will not be double-taxed:
- The foreign earned income exclusion.
- The foreign tax credit.
The foreign earned income exclusion is calculated on Form 2555, Foreign Earned Income, and is available to people working and living abroad for a majority of the tax year. It excludes up to $99,200 of income from being taxed in the U.S. As for the foreign taxes that she is paying, which are apparently quite high, she gets a tax credit equivalent to the amount of the foreign taxes that she pays during the year, and this is reported on Form 1116, Foreign Tax Credit.
Thanks for the great question and I hope you find some relief in the fact that there are IRS provisions specifically for people in situations similar to that of your daughter. Good luck to her in her time abroad, as it will surely prove to be a memorable and valuable experience for her.
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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.