Publication 54 - Tax Guide For U.s. Citizens And Resident Aliens Abroad - 2006 Page 16
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44Earned and
employer in the form of lodging, meals, or use of
as salary from the corporation. If $80,000 is a
a car is earned income.
Unearned Income
reasonable allowance as pay for the work you
did, then $80,000 is earned income.
Allowances or reimbursements. Earned in-
Earned income was defined earlier as pay for
come includes allowances or reimbursements
Stock options. You may have earned income
personal services performed. Some types of in-
you receive, such as the following amounts.
if you disposed of stock that you got by exercis-
come are not easily identified as earned or
•
ing a stock option granted to you under an em-
unearned income. Some of these types of in-
Cost of living allowances.
ployee stock purchase plan.
come are further explained here.
•
Overseas differential.
If your gain on the disposition of stock you
•
Income from a sole proprietorship or part-
got by exercising an option is treated as capital
Family allowance.
nership. Income from a business in which
gain, your gain is unearned income.
•
Reimbursement for education or education
capital investment is an important part of pro-
However, if you disposed of the stock less
allowance.
ducing the income may be unearned income. If
than 2 years after you were granted the option or
•
you are a sole proprietor or partner and your
less than 1 year after you got the stock, part of
Home leave allowance.
personal services are also an important part of
the gain on the disposition may be earned in-
•
Quarters allowance.
producing the income, the part of the income
come. It is considered received in the year you
•
that represents the value of your personal serv-
disposed of the stock and earned in the year you
Reimbursement for moving or moving al-
ices will be treated as earned income.
performed the services for which you were
lowance (unless excluded from income as
granted the option. Any part of the earned in-
discussed later in Reimbursement of em-
Capital a factor. If capital investment is an
come that is due to work you did outside the
ployee expenses under Earned and
important part of producing income, no more
United States is foreign earned income.
Unearned Income).
than 30% of your share of the net profits of the
See Publication 525, Taxable and Nontax-
business is earned income.
able Income, for a discussion of the treatment of
If you have no net profits, the part of your
Source of Earned Income
stock options.
gross profit that represents a reasonable allow-
ance for personal services actually performed is
The source of your earned income is the place
Pensions and annuities.
For purposes of the
considered earned income. Because you do not
where you perform the services for which you
foreign earned income exclusion, the foreign
have a net profit, the 30% limit does not apply.
received the income. Foreign earned income is
housing exclusion, and the foreign housing de-
income you receive for working in a foreign
duction, amounts received as pensions or annu-
Example 1. You are a U.S. citizen and meet
country. Where or how you are paid has no
ities are unearned income.
the bona fide residence test. You invest in a
effect on the source of the income. For example,
partnership based in Cameroon that is engaged
income you receive for work done in Austria is
Royalties. Royalties from the leasing of oil
solely in selling merchandise outside the United
income from a foreign source even if the income
and mineral lands and patents generally are a
States. You perform no services for the partner-
is paid directly to your bank account in the
form of rent or dividends and are unearned in-
ship. At the end of the tax year, your share of the
United States and your employer is located in
come.
net profits is $80,000. The entire $80,000 is
New York City.
Royalties received by a writer are earned
unearned income.
income if they are received:
Example. You are a U.S. citizen, a bona
•
For the transfer of property rights of the
Example 2. Assume that in Example 1 you
fide resident of Canada, and working as a min-
writer in the writer’s product, or
spend time operating the business. Your share
ing engineer. Your salary is $76,800 per year.
•
of the net profits is $80,000, 30% of your share
You also receive a $6,000 cost of living allow-
Under a contract to write a book or series
of the profits is $24,000. If the value of your
ance, and a $6,000 education allowance. Your
of articles.
services for the year is $15,000, your earned
employment contract did not indicate that you
income is limited to the value of your services,
were entitled to these allowances only while
Rental income. Generally, rental income is
$15,000.
outside the United States. Your total income is
unearned income. If you perform personal serv-
$88,800. You work a 5-day week, Monday
Capital not a factor. If capital is not an
ices in connection with the production of rent, up
through Friday. After subtracting your vacation,
income-producing factor and personal services
to 30% of your net rental income can be consid-
you have a total of 240 workdays in the year.
produce the business income, the 30% rule
ered earned income.
You worked in the United States during the year
does not apply. The entire amount of business
for 6 weeks (30 workdays). The following shows
income is earned income.
Example. Larry Smith, a U.S. citizen living
how to figure the part of your income that is for
in Australia, owns and operates a rooming
work done in Canada during the year.
Example. You and Lou Green are manage-
house in Sydney. If he is operating the rooming
ment consultants and operate as equal partners
house as a business that requires capital and
in performing services outside the United
personal services, he can consider up to 30% of
Number of
States. Because capital is not an income-
net rental income as earned income. On the
days worked
producing factor, all the income from the part-
in Canada
other hand, if he just owns the rooming house
nership is considered earned income.
during the
and performs no personal services connected
year (210)
with its operation, except perhaps making minor
Income from a corporation. The salary you
Total
repairs and collecting rents, none of his net
Number of
receive from a corporation is earned income
×
income
=
$77,700
income from the house is considered earned
days of work
only if it represents a reasonable allowance as
($88,800)
income. It is all unearned income.
during the
compensation for work you do for the corpora-
year for
tion. Any amount over what is considered a
Professional fees. If you are engaged in a
which
reasonable salary is unearned income.
payment was
professional occupation (such as a doctor or
made
lawyer), all fees received in the performance of
Example 1. You are a U.S. citizen and an
(240)
these services are earned income.
officer and stockholder of a corporation in Hon-
Your foreign source earned income is
duras. You perform no work or service of any
Income of an artist. Income you receive from
$77,700.
kind for the corporation. During the tax year you
the sale of paintings is earned income if you
receive a $10,000 “salary” from the corporation.
painted the pictures yourself.
The $10,000 clearly is not for personal services
Scholarships and fellowships. Any portion
and is unearned income.
of a scholarship or fellowship grant that is paid to
Example 2. You are a U.S. citizen and work
you for teaching, research or other services is
full time as secretary-treasurer of your corpora-
considered earned income if you must include it
tion. During the tax year you receive $100,000
in your gross income. If the payer of the grant is
Page 16
Chapter 4 Foreign Earned Income and Housing: Exclusion – Deduction
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