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

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Example. You are privately employed and

granted the option. Any part of the earned in-

Any reimbursement of moving expenses

come that is due to work you did outside the

live in Japan all year. You are paid a salary of

you deducted in an earlier year.

United States is foreign earned income.

$6,000 a month. You live rent-free in a house

This section discusses reimbursements that

See Publication 525, Taxable and Nontax-

provided by your employer that has a fair rental

must be included in earned income. Publication

able Income, for a discussion of the treatment of

value of $3,000 a month. The house is not pro-

521, Moving Expenses, discusses additional

stock options.

vided for your employer’s convenience. You re-

rules that apply to moving expense deductions

port on the calendar-year, cash basis. You

and reimbursements.

Pensions and annuities.

For purposes of the

received $72,000 salary from foreign sources

foreign earned income exclusion, the foreign

plus $36,000 fair rental value of the house, or a

The rules for determining when the reim-

housing exclusion, and the foreign housing de-

total of $108,000 of earned income.

bursement is considered earned or where the

duction, amounts received as pensions or annu-

reimbursement is considered earned may differ

ities are unearned income.

somewhat from the general rules previously dis-

Reimbursement of employee expenses. If

cussed.

you are reimbursed under an accountable plan

Royalties. Royalties from the leasing of oil

Although you receive the reimbursement in

(defined below) for expenses you incur on your

and mineral lands and patents generally are a

one tax year, it may be considered earned for

employer’s behalf and you have adequately ac-

form of rent or dividends and are unearned in-

services performed, or to be performed, in an-

counted to your employer for the expenses, do

come.

other tax year. You must report the reimburse-

not include the reimbursement for those ex-

Royalties received by a writer are earned

ment as income on your return in the year you

penses in your earned income.

income if they are received:

receive it, even if it is considered earned during

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For the transfer of property rights of the

The expenses for which you are reimbursed

a different year.

writer in the writer’s product, or

are not considered allocable (related) to your

Move from U.S. to foreign country. If you

earned income. If expenses and reimbursement

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Under a contract to write a book or series

move from the United States to a foreign coun-

are equal, there is nothing to allocate to ex-

of articles.

try, your moving expense reimbursement is gen-

cluded income. If expenses are more than the

erally considered pay for future services to be

reimbursement, the unreimbursed expenses are

performed at the new location. The reimburse-

Rental income. Generally, rental income is

considered to have been incurred in producing

ment is considered earned solely in the year of

unearned income. If you perform personal serv-

earned income and must be divided between

the move if you qualify for the exclusion for a

ices in connection with the production of rent, up

your excluded and included income in determin-

period that includes at least 120 days during that

to 30% of your net rental income can be consid-

ing the amount of unreimbursed expenses you

tax year.

ered earned income.

can deduct. (See chapter 5.) If the reimburse-

ment is more than the expenses, no expenses

If you are neither a bona fide resident of nor

Example. Larry Smith, a U.S. citizen living

remain to be divided between excluded and in-

physically present in a foreign country or coun-

in Australia, owns and operates a rooming

cluded income and the excess reimbursement

tries for a period that includes 120 days during

house in Sydney. If he is operating the rooming

must be included in earned income.

the year of the move, a portion of the reimburse-

house as a business that requires capital and

ment is considered earned in the year of the

These rules do not apply to the following

personal services, he can consider up to 30% of

move and a portion is considered earned in the

individuals.

net rental income as earned income. On the

year following the year of the move. To figure the

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other hand, if he just owns the rooming house

Straight-commission salespersons.

amount earned in the year of the move, multiply

and performs no personal services connected

the reimbursement by a fraction. The numerator

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Employees who have arrangements with

with its operation, except perhaps making minor

(top number) is the number of days in your

their employers under which taxes are not

repairs and collecting rents, none of his net

qualifying period that fall within the year of the

withheld on a percentage of the commis-

income from the house is considered earned

move, and the denominator (bottom number) is

sions because the employers consider

income. It is all unearned income.

the total number of days in the year of the move.

that percentage to be attributable to the

The difference between the total reimburse-

employees’ expenses.

Professional fees. If you are engaged in a

ment and the amount considered earned in the

professional occupation (such as a doctor or

year of the move is the amount considered

Accountable plan. An accountable plan is

lawyer), all fees received in the performance of

earned in the year following the year of the

a reimbursement or allowance arrangement that

these services are earned income.

move. The part earned in each year is figured as

includes all three of the following rules.

shown in the following example.

Income of an artist. Income you receive from

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The expenses covered under the plan

the sale of paintings you created is earned in-

must have a business connection.

Example. You are a U.S. citizen working in

come.

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the United States. You were told in October

The employee must adequately account to

2007 that you were being transferred to a foreign

Scholarships and fellowships. Any portion

the employer for these expenses within a

country. You arrived in the foreign country on

of a scholarship or fellowship grant that is paid to

reasonable period of time.

December 15, 2007, and you are a bona fide

you for teaching, research or other services is

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The employee must return any excess re-

resident for the remainder of 2007 and all of

considered earned income if you must include it

imbursement or allowance within a rea-

2008. Your employer reimbursed you $2,000 in

in your gross income. If the payer of the grant is

sonable period of time.

January 2008 for the part of the moving expense

required to provide you with a Form W-2, Wage

that you were not allowed to deduct. Because

and Tax Statement, these amounts will be listed

you did not qualify for the exclusion under the

as wages.

Reimbursement of moving expenses. Re-

bona fide residence test for at least 120 days in

imbursement of moving expenses may be

Certain scholarship and fellowship in-

2007 (the year of the move), the reimbursement

earned income. You must include as earned

come may be exempt under other pro-

TIP

is considered pay for services performed in the

income:

visions. See Publication 970, Tax

foreign country for both 2007 and 2008.

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Benefits for Education, chapter 1.

Any reimbursements of, or payments for,

You figure the part of the reimbursement for

nondeductible moving expenses,

services performed in the foreign country in

Use of employer’s property or facilities. If

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Reimbursements that are more than your

2007 by multiplying the total reimbursement by a

you receive fringe benefits in the form of the right

deductible expenses and that you do not

fraction. The fraction is the number of days dur-

to use your employer’s property or facilities, the

return to your employer,

ing which you were a bona fide resident during

fair market value of that right is earned income.

the year of the move divided by 365. The re-

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Fair market value is the price at which the prop-

Any reimbursements made (or treated as

maining part of the reimbursement is for serv-

erty would change hands between a willing

made) under a nonaccountable plan (any

ices performed in the foreign country in 2008.

buyer and a willing seller, neither being required

plan that does not meet the rules listed

to buy or sell, and both having reasonable

above for an accountable plan), even if

This computation is used only to determine

knowledge of all the necessary facts.

they are for deductible expenses, and

when the reimbursement is considered earned.

Chapter 4 Foreign Earned Income and Housing: Exclusion – Deduction

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Irs Publication 54 - Tax Guide For U.s. Citizens And Resident Aliens Abroad - 2008 Page 17

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