Calculating the Foreign Earned Income Exclusion for Self-Employed Individuals

Transcription

1 Calculating the Foreign Earned Income Exclusion for Self-Employed Individuals

2 Objectives List the requirements for claiming IRC 911 benefits. Define foreign earned income from selfemployment. Calculate the foreign earned income exclusion (FEIE) for a self-employed individual. Complete Form Determine self-employment tax obligations.

3 Foreign Earned Income Exclusion (FEIE) 4 Mandatory Requirements 1. Have foreign earned income 2. Have a tax home in a foreign country (no U.S. abode) 3. Meet the bona fide resident or physical presence test 4. Make a valid election

4 Foreign Earned Income Capital Not a Material Factor If a business consists solely of personal services, all foreign source gross receipts are foreign earned income. If personal services are one part of producing income and capital investment is minimal, only the part of gross receipts for services performed in a foreign country is foreign earned income.

5 Foreign Earned Income Capital a Material Factor If capital investment is an important factor, the lesser of: 30% of individual s share of net profits reduced by deduction for ½ self-employment tax or Reasonable allowance as compensation for services performed in a foreign country

6 Information Required In order to compute FEIE, one must determine: Schedule C net profit The deduction for ½ self-employment tax Foreign earned income Foreign earned gross receipts Expenses definitely related to the foreign earned gross receipts

7 Form 2555, Part VII Foreign Earned Income Exclusion Maximum FEIE is the lesser of: Foreign Earned Income for the tax year minus the Foreign Housing Exclusion (if any) or Qualifying Days in the tax year divided by 365 (366, if leap year), multiplied by the Exclusion Amount for the calendar year

8 Form 2555, Part VIII Exclusion Amount Foreign earned income excluded Minus deductions allowed in figuring AGI allocable to the excluded income Equals Form 1040, Line 21 Exclusion Amount

9 Example Pike Bluegill U.S. citizen & bona fide resident of Zinnia Sole proprietor of specialty food store All business conducted in Zinnia 2016 Sch. C gross receipts $1,200, Sch. C expenses $ (700,000) 2016 Sch. C net profit $ 500,000 SE Tax $ 28,085 Deduction for ½ SE Tax $ 14,043

10 Example Foreign Earned Income Lesser of: - Reasonable compensation, in this example $125,000 or - 30% of net profit minus deduction for ½ SE tax, in this case: $500,000 x 0.3 = $150,000 $150,000 - $14,043 = $135,957 So... Pike s 2016 foreign earned income is $125,000.

11 Foreign Housing Deduction Lesser of : Foreign Housing Cost Amount* or Foreign earned income minus foreign earned income exclusion minus foreign housing exclusion, if any * Foreign Housing Cost Amount = Qualified Housing Expenses [(Maximum FEIE x 16%) x (Qualifying Days in Tax Year / Total Number of Days in Tax Year)].

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16 Example Expenses Allocable to Excluded Income Sch C Expenses plus Deduction for ½ SE Tax multiplied by the ratio of Excluded Gross Receipts to Total Gross Receipts ($700,000 + $14,043) x ($101,300 / $1,200,000) = $60,277

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18 Self-Employment Tax and Totalization Agreements Generally, a U.S. citizen or resident alien with net earnings from self-employment must pay self-employment tax. Totalization Agreements Avoid dual coverage and dual contributions (taxes) on the same earnings. Govern whether self-employment taxes must be paid to U.S. or to foreign country.

19 Totalization Agreements Certificate of Coverage If there is an Totalization Agreement in place and the individual is exempt under the terms of the agreement: Attach Certificate of Coverage from foreign country (or from Social Security Administration) to return each year. Print Exempt, see attached statement on line for selfemployment tax.

20 Foreign Earned Income Exclusion Effect on Credits or Deductions Cannot claim Earned Income Credit AGI must be increased by the amount of the FEIE when computing Child Tax Credit/Additional Child Tax Credit For taxable years ending after December 31, 2014, not eligible for the Additional Child Tax Credit Cannot claim foreign tax credit or take a deduction for foreign taxes paid on the excluded income

21 Resources Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad Foreign-Earned-Income-Exclusion Practice Units at

22 Questions