How do I report foreign income on my US tax return in 2025?

U.S. citizens and resident aliens must report worldwide income regardless of where they live or where the income was earned. This includes wages, self-employment income, investment income, rental income, and pensions from foreign sources.

Foreign Earned Income Exclusion (FEIE): If you live and work abroad, you may exclude up to $126,500 (2024) of foreign earned income using Form 2555. You must meet either the bona fide residence test (resident of a foreign country for an entire tax year) or the physical presence test (physically present in a foreign country for 330 full days in any 12-month period). The exclusion only applies to earned income (wages, self-employment), not investment or passive income.

Foreign Tax Credit (FTC): Alternatively, you can claim a credit on Form 1116 for income taxes paid to foreign governments. This directly reduces your US tax dollar-for-dollar (up to the US tax on that foreign income). The FTC is generally better than the FEIE for high earners because it can offset US tax on income above the FEIE limit.

FBAR and FATCA reporting: If you have foreign financial accounts with an aggregate value exceeding $10,000 at any point during the year, you must file FinCEN Form 114 (FBAR) electronically by April 15 (automatic extension to October 15). Penalties for non-filing are severe: up to $12,909 per account for non-willful violations and up to $129,210 or 50% of account value for willful violations. FATCA (Form 8938) has higher thresholds but similar reporting requirements.

Foreign pensions, trusts, and businesses: These have complex reporting requirements including Forms 3520, 5471, and 8865. Penalties for non-filing can be $10,000 to $25,000 per form. Consult a tax professional specializing in international tax if you have foreign entities.