What is the taxation of foreign income?

Foreign income is money earned from sources outside of the United States. In Hawaii, foreign income is taxable by the state and the IRS. The taxation of foreign income depends on several factors. Generally, foreign income is taxed in the same way as domestic income, such as wages earned or investments. However, there are some exceptions if taxes are paid in the country where the income is earned. Usually, this is referred to as a Foreign Tax Credit, where the amount of taxes paid in the foreign country is subtracted from the amount of taxes owed in the United States. This is to prevent double taxation on the same income. Foreign income must be reported to the IRS, regardless of whether or not tax is due. It needs to be reported on a Form 1040 and in a schedule B, which shows foreign income and any foreign taxes paid. If tax is due, taxpayers can choose between filing a regular return or using the foreign earned income exclusion, which excludes a certain amount of foreign income from taxation. Hawaii also has a State Tax Credit for foreign income, so taxpayers can deduct an amount of income earned outside of Hawaii. This can be claimed by completing a Form NH-H. It is important to be aware of the different regulations for foreign income in Hawaii, in order to properly file taxes.

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