Worldwide Income

Worldwide Income: Meaning and How It Works

Worldwide income is the total of a taxpayer’s earnings from all sources, both domestic and foreign. In countries with residence-based taxation—like the United States—residents and citizens are generally taxed on their worldwide income, regardless of where the income is earned.

Who Must Report Worldwide Income

• U.S. citizens and resident aliens must report income earned anywhere in the world.
• Nonresident aliens are generally taxed only on U.S.-source income.
• Special rules and exceptions may apply for taxpayers who live abroad.

What Counts as Worldwide Income

Worldwide income includes:
– Wages and salaries (U.S. or foreign)
– Self-employment and contractor earnings
– Investment income (interest, dividends)
– Rental income, royalties, and pensions
– Passive and active business income

All sources must be considered when determining taxable income unless a specific exclusion or exemption applies.

Avoiding Double Taxation: Exclusions and Credits

To reduce double taxation when income is taxed by both the U.S. and a foreign jurisdiction, taxpayers may use:
– Foreign Earned Income Exclusion (FEIE): Allows qualifying taxpayers who live and work abroad to exclude a portion of foreign earned wages from U.S. taxation.
– Foreign Tax Credit (FTC): Allows taxpayers to offset U.S. tax liability with income taxes paid to a foreign country.

Which option is better depends on the taxpayer’s circumstances and types of income.

Measurement and Reporting

Worldwide income is measured by aggregating revenue from all sources—foreign and domestic, active and passive. Taxpayers must report these amounts on their tax returns and may need to provide additional forms for foreign accounts, foreign-earned income, or foreign tax credits.

International Tax Planning and Compliance

• Multinational corporations and high-net-worth individuals often use specialized tax planning to reduce worldwide tax liabilities. Strategies can include entity structuring, timing of income recognition, and use of tax treaties.
• Tax advisors can recharacterize or shift income among related entities; jurisdictions counteract abusive shifts with transfer pricing rules and anti-deferral provisions.
• Tax treaties between countries help allocate taxing rights, provide mechanisms to avoid double taxation, and offer dispute resolution.

Key Takeaways

• Worldwide income = all income from all countries and sources.
• Residents (and citizens in residence-based systems) must report worldwide income to their tax authorities.
• Foreign Earned Income Exclusion and Foreign Tax Credit are the primary U.S. mechanisms to mitigate double taxation.
• Cross-border tax planning is common but subject to rules such as transfer pricing, anti-deferral regimes, and international treaties.

Sources

• Internal Revenue Service — Foreign Earned Income Exclusion
• Internal Revenue Service — Foreign Tax Credit
• Internal Revenue Service — What is Taxable and Nontaxable Income?
• Internal Revenue Service — Publication 525, Taxable and Nontaxable Income
• Internal Revenue Service — FAQs About International Individual Tax Matters