In the provided scenario of a taxpayer living abroad, which statement accurately reflects their tax obligations?

The correct choice indicates that the taxpayer living abroad must report worldwide income. This reflects the principle of tax residency, where U.S. citizens and resident aliens are required to report their worldwide income, even if they are residing in a foreign country. This obligation applies to all forms of income, not just wages, and includes interest, dividends, and other earnings.

Reporting worldwide income ensures that taxpayers fulfill their responsibilities under U.S. tax law, regardless of where the income is earned. It is important for expats to understand this obligation as it affects their overall tax calculations and potential eligibility for credits or exclusions, such as the Foreign Earned Income Exclusion or the Foreign Tax Credit, which could alleviate double taxation but does not exempt them from reporting all income. This comprehensive approach to taxation is fundamental for those with international financial interests.