Foreign-Source Income

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Foreign-source income is income treated as coming from outside the United States under U.S. tax sourcing rules. For U.S. expats, this can include wages for work performed abroad, foreign rental income, certain foreign dividends or interest, foreign business income, and gains or income connected to foreign property or investments.

Why it matters for U.S. expats

Foreign-source income affects how U.S. expats claim the Foreign Tax Credit, calculate the Foreign Tax Credit limitation, report foreign earned income, and separate income into the correct categories on Form 1116. It is not the same as income paid by a foreign employer or deposited into a foreign bank account; the source depends on U.S. tax rules for the specific type of income.

Common questions

1. What counts as foreign-source income?

Foreign-source income is income that U.S. tax rules treat as arising outside the United States. The source depends on the type of income, such as wages, rent, dividends, interest, royalties, business income, or gains.

2. Are wages foreign-source income if I work abroad?

Yes. Compensation for personal services is sourced where the work is performed, so wages for work performed in a foreign country are foreign-source income.

3. Does it matter where my employer is located?

No. For wages and other compensation, the source is based on where the services are performed, not where the employer is based or where the payment is deposited.

4. Is foreign-source income the same as foreign earned income?

No. Foreign earned income is compensation for services performed abroad. Foreign-source income is broader and can include earned income, rental income, investment income, business income, and some gains.

5. Is foreign rental income foreign-source income?

Yes. Rental income from property located outside the United States is foreign-source income.

6. Are foreign dividends foreign-source income?

Often, yes. Dividends are usually sourced based on the corporation paying the dividend, but special rules can apply.

7. Is foreign interest income foreign-source income?

Interest is usually sourced based on the residence of the payer. Interest from a foreign bank or foreign borrower is often foreign-source income, but the facts need to be checked.

8. Are foreign capital gains foreign-source income?

Not always. Capital gain sourcing can depend on the taxpayer’s residence, asset type, and specific U.S. sourcing rules, so foreign capital gains need to be reviewed carefully.

9. Why does foreign-source income matter for the Foreign Tax Credit?

The Foreign Tax Credit is limited by the amount of U.S. tax connected to foreign-source taxable income. If income is not foreign-source, foreign tax paid on it may not produce the expected U.S. credit.

10. Does the Foreign Earned Income Exclusion apply to all foreign-source income?

No. The Foreign Earned Income Exclusion applies only to qualifying foreign earned income. It does not apply to foreign-source investment income, pensions, capital gains, or rental income.

11. Can foreign-source income be U.S. taxable?

Yes. U.S. citizens and green card holders report worldwide income, including foreign-source income, on their U.S. tax return.

12. What records help prove foreign-source income?

Keep work records, travel records, employer letters, contracts, invoices, rental statements, investment statements, foreign tax documents, property records, and exchange-rate calculations.

Related forms

• Form 1040: U.S. Individual Income Tax Return
• Form 1116: Claiming the Foreign Tax Credit
• Form 2555: Foreign Earned Income Exclusion
• Schedule E: Supplemental Income and Loss
• Schedule D: Capital Gains and Losses
• Schedule C: Profit or Loss From Business

When to get help

Professional guidance is important when:

• You have income from work, investments, rental property, pensions, or a business outside the United States.
• You are claiming the Foreign Tax Credit.
• You need to separate general category income from passive category income.
• You worked partly in the United States and partly abroad.
• You sold foreign property, investments, or business assets.
• You paid foreign tax but are unsure whether the income is foreign-source under U.S. rules.
• You need to coordinate Form 1116, Form 2555, Schedule E, Schedule D, or Schedule C.

Bright!Tax can identify which income is foreign-source, apply the correct sourcing rules, and prepare the Foreign Tax Credit or Foreign Earned Income Exclusion forms where available. Get started with Bright!Tax.

Related Bright!Tax guides

• What is the Foreign Tax Credit? Your guide to avoiding double tax
• Foreign Earned Income Exclusion guide
• Foreign Tax Credit vs. Foreign Earned Income Exclusion

Official sources

• IRS: Publication 514, Foreign Tax Credit for Individuals
• IRS: Instructions for Form 1116
• IRS: Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad
• IRS: U.S. citizens and resident aliens abroad

Reviewed by

Katelynn Minott, CPA & CEO

Last reviewed

July 2026