All US citizens and permanent residents (Green Card holders [but see the note below]) must file annual U.S. income tax returns including all their worldwide income. There are two principal types of income — earned (wages, salaries, self-employment income and earned royalties from, inter alia, books and patents) and unearned or investment income (dividends, interest, capital gains, rental income, and royalty income from, inter alia, oil and gas investments).

There are two lines of defense against paying US. income tax on your foreign income. First, for your earned income you may take advantage of the Foreign Earned Income Exclusion and exclude up to $91,400 in 2009 using Form 2555 if you lived outside of the US for at least 330 days out of any 365-day period. Also you may be able to exclude or deduct some of your foreign housing expenses on the same form. Second, for all types of income you may take a credit on Form 1116 for the foreign income taxes (and in many cases foreign payroll taxes – see below) you paid on your foreign income.

There are many nuances to US taxation of your foreign income, one of which we discuss below. we would be honored to help you minimize the US’s tax bite on your foreign and domestic income, but preparation of US tax returns including foreign income is expensive. My fee typically ranges from $800-$3,000. Quality is expensive, and we believe you will find it money well spent.

Note: If you are a Green Card holder and want to avoid the hassle of filing Form 1040 and reporting your world-wide income, you may want to consider an alternative with some risk attached. If you live in a country that has a tax treaty with the US, you may file as a non-resident alien using Form 1040NR with a Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), attached if you qualify to do so under the treaty tie-breaker rules. There is some risk that the INS may revoke your Green Card. The last sentence of Treas. Reg. Section 301.7701(b)-7(b) says, “The filing of a Form 1040NR by a [Green Card holder] may affect the determination by the INS as to whether the individual qualifies to maintain a residency permit.”

We have several clients in this situation. They would rather not hassle with filing a regular 1040 each year, but they put up with it in light of the risk to their residency status.