For U.S. taxpayers, reporting worldwide income is a fundamental requirement, even if that income is earned or sourced outside the United States. This includes rental income from properties in Israel or any other foreign country. Failure to report foreign income can result in significant penalties, making it essential to understand how to properly comply with U.S. tax laws.
Who Needs to Report Foreign Income?
Any U.S. citizen, Green Card holder, or resident alien must report all income earned worldwide, regardless of where they live or where the income is generated. This includes:
– Foreign rental income
– Foreign salary or wages
– Self-employment income earned abroad
– Foreign dividends, interest, and capital gains
– Foreign pensions and retirement accounts
Even if you already pay foreign taxes on this income, you still need to report it on your U.S. tax return. However, tax credits and exclusions may help reduce or eliminate double taxation.
Reporting Foreign Rental Income
If you own a property in Israel or any other country and rent it out, you must report that rental income on Schedule E (Supplemental Income and Loss) of your U.S. tax return (Form 1040).
Key Considerations for Foreign Rental Income
1. Exchange Rate – The IRS requires income to be reported in U.S. dollars, meaning you must convert your rental income from shekels (NIS) to USD using an appropriate exchange rate.
2. Deductible Expenses – You may be able to deduct expenses such as property management fees, maintenance, mortgage interest, and property taxes.
3. Depreciation – Unlike domestic properties, the depreciation period for foreign rental property is 40 years under U.S. tax rules.
4. Foreign Taxes Paid – If you pay Israeli taxes on your rental income, you may be eligible for a Foreign Tax Credit to avoid double taxation.
Other Common Types of Foreign Income
Foreign Salary or Self-Employment Income
If you work in another country or own a business abroad, you must report all wages, salary, and self-employment income on your U.S. tax return. However, you may qualify for the Foreign Earned Income Exclusion (FEIE), which allows you to exclude a portion of foreign-earned income if you meet either the Physical Presence Test or the Bona Fide Residence Test.
Foreign Dividends, Interest, and Capital Gains
Investments in foreign stocks, bonds, or mutual funds generate taxable income that must be reported. Additionally, if you own foreign mutual funds, you may have to file Form 8621 (PFIC Reporting), which involves complex tax rules.
Additional Reporting Requirements
1. FBAR (Foreign Bank Account Report – FinCEN Form 114)
– If you have foreign bank accounts with a combined balance exceeding $10,000 at any time during the year, you must file an FBAR.
2. FATCA (Form 8938 – Statement of Foreign Financial Assets)
– If your foreign financial assets exceed $50,000 (single) or $100,000 (married filing jointly), you must file Form 8938 with your tax return.
The IRS has strict penalties for failing to report foreign income or required disclosures. If you have unreported foreign income, you may be able to use programs such as the Streamlined Filing Compliance Procedures to correct past mistakes without severe penalties.
Owning foreign assets or earning foreign income adds complexity to your tax situation, but proper reporting ensures compliance with IRS rules and helps avoid costly penalties. If you have rental income from Israel or any other country, consulting a tax professional who understands international tax laws is highly recommended.
If you need guidance on reporting foreign income, Signature CPAs & Advisors specializes in helping individuals and businesses navigate international tax matters. Contact us today for expert assistance!
