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Citizenship-Based Taxation in the USA

The United States employs a system of citizenship-based taxation, which means that all U.S. citizens and resident aliens are subject to U.S. federal income tax on their worldwide income, regardless of where they live or where the income is earned. This system requires U.S. taxpayers to report all income, including income from foreign sources, on their U.S. income tax return.

Including Worldwide Income on Your U.S. Tax Return

Step	Action	Details
1	Report Worldwide Income	All income, including wages, interest, dividends, rental income, and any other type of income, must be reported on your U.S. tax return in U.S. dollars.
2	Convert Foreign Currency	Use the yearly average exchange rate to convert foreign currency to U.S. dollars for reporting on your tax return, unless a specific transaction date rate is required.
3	File Required Forms	Depending on the type and amount of foreign income, you may need to file additional forms, such as Form 8938 (Statement of Specified Foreign Financial Assets) or Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund).

Foreign Tax Credit or Deduction

If you have paid or accrued taxes to a foreign country on income that is also subject to U.S. taxation, you may be eligible for a foreign tax credit or deduction, which can reduce your U.S. tax liability.

Option	Form	Details
Foreign Tax Credit	Form 1116	Allows you to credit most income taxes paid to a foreign government against your U.S. tax liability. This is generally more beneficial than a deduction as it reduces your U.S. taxes dollar for dollar.
Foreign Tax Deduction	Schedule A (Form 1040)	If you choose not to take the foreign tax credit, you may be able to take a deduction for foreign income taxes paid. This is less beneficial than a credit as it only reduces your taxable income, not your tax liability.

Compliance and Reporting

It is crucial to maintain compliance with U.S. tax laws by accurately reporting foreign income and claiming appropriate credits or deductions. Failure to do so may result in penalties and interest. If you need assistance with your U.S. tax obligations, including how to report foreign income and claim foreign tax credits or deductions, please consult with a qualified tax professional.