Irs Publication 54 - Tax Guide For U.s. Citizens And Resident Aliens Abroad

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Foreign earned income does not include the

Reimbursement for moving or moving al-

than 30% of your share of the net profits of the

following amounts.

lowance (unless excluded from income as

business is earned income.

discussed later in Reimbursement of em-

If you have no net profits, the part of your

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The value of meals and lodging that you

ployee expenses under Earned and

gross profit that represents a reasonable allow-

exclude from your income because it was

Unearned Income).

ance for personal services actually performed is

furnished for the convenience of your em-

considered earned income. Because you do not

ployer.

have a net profit, the 30% limit does not apply.

Source of Earned Income

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Pension or annuity payments you receive,

including social security benefits (see Pen-

Example 1. You are a U.S. citizen and meet

The source of your earned income is the place

sions and annuities, later).

the bona fide residence test. You invest in a

where you perform the services for which you

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partnership based in Cameroon that is engaged

received the income. Foreign earned income is

Pay you receive as an employee of the

solely in selling merchandise outside the United

income you receive for working in a foreign

U.S. Government. (See U.S. Government

States. You perform no services for the partner-

Employees, later.)

country. Where or how you are paid has no

ship. At the end of the tax year, your share of the

effect on the source of the income. For example,

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Amounts you include in your income be-

net profits is $80,000. The entire $80,000 is

income you receive for work done in Austria is

cause of your employer’s contributions to

unearned income.

income from a foreign source even if the income

a nonexempt employee trust or to a non-

is paid directly to your bank account in the

qualified annuity contract.

Example 2. Assume that in Example 1 you

United States and your employer is located in

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spend time operating the business. Your share

Any unallowable moving expense deduc-

New York City.

of the net profits is $80,000, 30% of your share

tion that you choose to recapture as ex-

of the profits is $24,000. If the value of your

plained under Moving Expense

Example. You are a U.S. citizen, a bona

services for the year is $15,000, your earned

Attributable to Foreign Earnings in 2 Years

fide resident of Canada, and working as a min-

income is limited to the value of your services,

in chapter 5.

ing engineer. Your salary is $76,800 per year.

$15,000.

You also receive a $6,000 cost of living allow-

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Payments you receive after the end of the

ance, and a $6,000 education allowance. Your

Capital not a factor. If capital is not an

tax year following the tax year in which

employment contract did not indicate that you

income-producing factor and personal services

you performed the services that earned

were entitled to these allowances only while

the income.

produce the business income, the 30% rule

outside the United States. Your total income is

does not apply. The entire amount of business

$88,800. You work a 5-day week, Monday

income is earned income.

Earned income. This is pay for personal serv-

through Friday. After subtracting your vacation,

ices performed, such as wages, salaries, or pro-

you have a total of 240 workdays in the year.

Example. You and Lou Green are manage-

fessional fees. The list that follows classifies

You worked in the United States during the year

ment consultants and operate as equal partners

many types of income into three categories. The

for 6 weeks (30 workdays). The following shows

in performing services outside the United

column headed Variable Income lists income

how to figure the part of your income that is for

States. Because capital is not an income-

that may fall into either the earned income cate-

work done in Canada during the year.

producing factor, all the income from the part-

gory, the unearned income category, or partly

nership is considered earned income.

into both. For more information on earned and

unearned income, see Earned and Unearned

Number of

Income from a corporation. The salary you

days worked

Income, later.

receive from a corporation is earned income

in Canada

during the

Earned

Unearned

Variable

only if it represents a reasonable allowance as

year (210)

Income

compensation for work you do for the corpora-

Total

tion. Any amount over what is considered a

Salaries and

Dividends

Business

Number of

income

$77,700

reasonable salary is unearned income.

wages

Interest

profits

days of work

($88,800)

Commissions

Capital gains

Royalties

during the

Bonuses

Gambling

Rents

Example 1. You are a U.S. citizen and an

year for

Professional

winnings

Scholarships

which

officer and stockholder of a corporation in Hon-

fees

Alimony

and

payment was

duras. You perform no work or service of any

Tips

Social security

fellowships

made

kind for the corporation. During the tax year you

benefits

(240)

receive a $10,000 “salary” from the corporation.

Pensions

The $10,000 clearly is not for personal services

Your foreign source earned income is

Annuities

and is unearned income.

$77,700.

In addition to the types of earned income

listed, certain noncash income and allowances

Example 2. You are a U.S. citizen and work

or reimbursements are considered earned in-

Earned and

full time as secretary-treasurer of your corpora-

come.

tion. During the tax year you receive $100,000

Unearned Income

as salary from the corporation. If $80,000 is a

Noncash income. The fair market value of

Earned income was defined earlier as pay for

reasonable allowance as pay for the work you

property or facilities provided to you by your

personal services performed. Some types of in-

did, then $80,000 is earned income.

employer in the form of lodging, meals, or use of

come are not easily identified as earned or

a car is earned income.

unearned income. Some of these types of in-

Stock options. You may have earned income

come are further explained here.

if you disposed of stock that you got by exercis-

Allowances or reimbursements. Earned in-

ing a stock option granted to you under an em-

come includes allowances or reimbursements

Income from a sole proprietorship or part-

ployee stock purchase plan.

you receive, such as the following amounts.

nership. Income from a business in which

If your gain on the disposition of stock you

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capital investment is an important part of pro-

Cost of living allowances.

got by exercising an option is treated as capital

ducing the income may be unearned income. If

gain, your gain is unearned income.

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Overseas differential.

you are a sole proprietor or partner and your

However, if you disposed of the stock less

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personal services are also an important part of

Family allowance.

than 2 years after you were granted the option or

producing the income, the part of the income

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less than 1 year after you got the stock, part of

Reimbursement for education or education

that represents the value of your personal serv-

the gain on the disposition may be earned in-

allowance.

ices will be treated as earned income.

come. It is considered received in the year you

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Home leave allowance.

Capital a factor. If capital investment is an

disposed of the stock and earned in the year you

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Quarters allowance.

important part of producing income, no more

performed the services for which you were

Page 16

Chapter 4 Foreign Earned Income and Housing: Exclusion – Deduction

Irs Publication 54 - Tax Guide For U.s. Citizens And Resident Aliens Abroad - 2008 Page 16

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