Are you earning abroad in the USA? If yes, then you must know that the US Taxation rules apply to you more than you know. The U.S. government taxes its citizens and resident aliens on their worldwide income. It does not matter which country you live in. If you ignore these taxation rules, the result will be serious.
However, there is also good news. There are several legal ways to reduce or exclude a large part of your foreign income from U.S. taxes. It is called the Foreign Earned Income Exclusion (FEIE). In this article, we will understand the USA Taxation in simple language.
Who Needs to Worry About USA Taxation?
Under USA Taxation rules, you are required to file a U.S. tax return if you fall into any of these categories:
- You are a U.S. citizen living in India or any other country.
- You are a Green Card holder (lawful permanent resident).
- You are a resident alien who passes either the Green Card Test or the Substantial Presence Test.
- You are physically present in the U.S. for at least 330 days during any 12 months.
Important Note: Green Card holders have recently been asked to show proof of ITR Filing. This is mandatory to do before re-entering the U.S. You can not take this lightly.
What Is Foreign Earned Income as per USA Taxation Rules?
Foreign earned income, as per USA Taxation rule,s refers to money you earn for personal services you perform in a foreign country. This includes:
- Salary and wages from a job outside the U.S.
- Freelance or professional fees earned abroad.
- Business income from self-employment in a foreign country.
- Allowances like housing, meals, or cars are provided by your foreign employer.
However, it does not include: dividends, interest, rental income, pensions, or income earned while working for the U.S. government.
The Big Benefit under USA Taxation: Foreign Earned Income Exclusion
Under the USA Taxation law, if you qualify, you can exclude a significant portion of your foreign income from U.S. taxes. The limits vary as per the year, and the IRS decides them each year. These limits for the past few years are as follows:
| Tax Year | Exclusion Amount (USD) |
| 2020 | $1,07,600 |
| 2021 | $1,08,700 |
| 2022 | $1,12,000 |
| 2025 | $1,30,000 |
To claim these exclusions, the taxpayers have to do their IRS or ITR Filing using Form 2555. The form covers everything from your employer details to allowances, noncash benefits, and self-employment income. It is one of the most important forms under USA Taxation for Indians working abroad.
Key Forms You Need to Know for ITR Filing in the USA
ITR Filing for international taxpayers involves several U.S. forms. Here are the most relevant ones:
- Form 1040 – The main U.S. Individual Income Tax Return.
- Form 2555 – For claiming the Foreign Earned Income Exclusion.
- Form 1116 – Foreign Tax Credit (for individuals).
- Form 8938 – To report foreign financial assets above a threshold.
- FinCEN Form 114 (FBAR) – For foreign bank accounts holding over $10,000.
- Form 2350 / 4868 – Extensions for filing your return if you are outside the U.S.
USA Taxation 2026 for Foreign Entrepreneurs
- For Indians who run businesses in the U.S., LLC company registration is a common first step.
- Once you have an LLC company registration, your business income and filing obligations change significantly.
- Having LLC Company Registration can help you save taxes and legally separate your financial obligations.
What is the Foreign Tax Credit as per the USA Taxation Rules?
Many Indians living abroad already pay taxes in their country of residence. As a result, the USA Taxation rules allow you to claim a Foreign Tax Credit for taxes already paid to a foreign government. So, it makes your U.S. tax liability a little less. However, you must know that you can either:
- Take the foreign taxes as a Credit (reduces your U.S. tax bill directly) — most beneficial in most cases.
- Take it as a Deduction on Schedule A of Form 1040.
Important Note: You cannot claim both the Foreign Earned Income Exclusion and the Foreign Tax Credit on the same income. You must choose one.
Special Note for Indians with an LLC in the U.S.
Many Indian entrepreneurs prefer LLC company registration because of its flexibility and limited liability protection.
After LLC company registration, the company’s income is typically passed through to the owner’s personal tax return (a “pass-through” structure). This means all income from your U.S. LLC must be reported under USA Taxation rules. even if you live in India. Your ITR Filing must include Form 5471 (for certain foreign corporations), Form 8865 (for foreign partnerships), or Form 926 (for property transfers to foreign entities) as applicable.
What happens to taxation if you are married to a non-resident in the USA?
If you are a U.S. citizen or resident alien married to a non-resident alien (like an Indian spouse), you can jointly elect to treat the non-resident spouse as a U.S. resident for tax purposes.
Both spouses must sign a statement and attach it to the joint return for the first year this election is made. Once made, this election stays until you officially revoke it.
Frequently Asked Questions (FAQs)
Q1. Do Indian Green Card holders need to file U.S. taxes?
Yes. As per USA Taxation rules, Green Card holders are treated as U.S. residents and must file a U.S. tax return on their worldwide income. It doesn’t matter where they live.
Q2. What is the Substantial Presence Test?
You are considered a U.S. resident if you were physically present in the U.S. for at least 31 days in the current year AND a total of 183 days across the current year and the two preceding years (counting all days in the current year, one-third of the prior year, and one-sixth of the year before that).
Q3. Can I claim both the Foreign Earned Income Exclusion and the Foreign Tax Credit?
No. You must choose one.
Q4. Does ITR Filing in India affect my U.S. taxes?
ITR Filing in India and U.S. tax filing are separate obligations. However, taxes paid in India can often be used to claim the Foreign Tax Credit in the U.S. Always consult a qualified CA, such as one from our team at E-Startup, who handles both Indian and U.S. taxation.
Q5. How does the USA Taxation system operate if I get LLC Company Registration?
After LLC company registration in U.S., the income is generally treated as pass-through income on your personal U.S. tax return. This means all LLC earnings must be reported under the USA Taxation rules. You may also be required to file additional forms like Form 5471, Form 8865, or Form 926, depending on the structure.
Conclusion
In conclusion, the USA Taxation can seem complex, especially for Indians living abroad or running businesses in the U.S. But with the right knowledge and the help of a qualified CA, you can legally reduce your tax burden. So, staying compliant with USA Taxation rules is not only mandatory but a smart move. For any doubts or clarification regarding USA Taxation 2026, feel free to consult our professionals at: 8881-069-069.
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