Intuit Academy Tax Practice Exam

What is true regarding U.S. citizens and their foreign income?

1. Only U.S.-made income is taxed

2. They are not taxed on foreign income

3. They must report worldwide income

4. Foreign income is exempt under treaty

The correct answer is: They must report worldwide income

U.S. citizens are required to report their worldwide income, which includes income earned both domestically and abroad. This requirement is set forth by the Internal Revenue Service (IRS) and applies to all U.S. citizens regardless of where they reside or earn their income. While the U.S. offers certain provisions, such as the foreign earned income exclusion or foreign tax credits, these options do not exempt individuals from the obligation to report foreign income; they simply provide mechanisms to potentially reduce taxable income or alleviate tax liabilities. In addition, even if a citizen resides in a foreign country or earns income there, they remain liable for U.S. tax obligations. The requirement to report worldwide income emphasizes the U.S. tax system’s approach to taxation, which can be perceived as residence-based rather than purely source-based income taxation. The other options fail to accurately represent the U.S. taxation of citizens’ income. Some suggest restrictions or exemptions that do not align with the comprehensive reporting obligation that applies to citizens.