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Worldwide income refers to the collective sum of all of a taxpayer’s passive and active income, both from domestic or foreign sources. In the United States, the Internal Revenue Service (IRS) requires complete disclosure of the worldwide income, which consists of all money received by U.S. citizens or resident aliens from any source. This includes royalties, rental income, investment income, and wages. The aggregate total worldwide income determines the tax bracket for the taxpayer, even though some of the income may be eligible for exclusions and credits. For U. S. citizens who are working abroad, the Foreign Earned Income Exclusion allows workers to exclude up to 30 percent of their foreign earnings to a maximum of about $91,500 U.S. Dollars (USD) from the taxable income, although the exclusion does not change the tax bracket.
Overseas employees can also exclude part of the worldwide income that contributes to lodging in a foreign country. Self-employed workers may claim a direct deduction for overseas housing, determined by taking a percentage of the excluded income. The maximum deduction that is allowed for housing is about $27,420 USD, except for 300 foreign locations for which the IRS allows a higher limit. Expenses that may be eligible for exclusion include utilities, rent, insurance, and repairs. The IRS, however, does not permit higher exclusions on expenses for ultra luxurious apartments or extravagant homes.
In order to avoid double taxation, most countries that tax worldwide income grant foreign tax credit (FTC) to those individuals and companies that have paid taxes in other countries or jurisdictions. Factors determining eligibility for FTC include whether the two countries involved have a tax treaty, whether the foreign taxes were compulsory, and whether the foreign country offers a tax credit. Other considerations include any services provided by the foreign country in exchange for the tax, any ongoing political issues between the countries, and the nature of the payments made. Most countries restrict the FTC by the nature of the income, passive or active.
The IRS uses the worldwide income to determine the taxable income. Taxable income includes salaries, bonuses, tips, and severance pay. Interest earned on bank accounts, dividends, and bonds, with the exception of municipal bonds, also may be taxed. The amount by which the income from the sale of an asset exceeds the initial cost of the asset, called capital gains, is also taxable. Winnings from gambling, lottery winnings, royalties, and bartered goods and services are also subject to taxation.
Nontaxable forms of worldwide income include child support payments, repaid loans, disability income, and retirement contributions. Flexible spending accounts (FSA), established by employers, allow pretax dollars to be deposited by the employee for use throughout a given year for approved childcare expenses or medical expenses. Such contributions to FSAs are not taxable, but the funds are lost if not used appropriately within the tax year. When a company returns invested capital to an investor, the original amount of the investment that is returned is not taxable.
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