foreign income and EIC

[ardi600]

filing 2555 or 2555 ez disqualifies a peson from getting EIC. now, i am wondering does a person have to file that to exclude foreign income if they meet one of the tests(phy.presence or bona fide res.)?
in some cases it is definitely more beneficial to include the foreign income and take the EIC as opposed to excluding it?
my client has foreign income, but came to the states and worked and has three kids. so she would be entitled to a good amount of EIC.
just wondering if IRS has any rules against that? also i still can not figure out if she is subject to SE tax since she worked for a foreign company and was on salary.

[Koss]

Foreign Income

i still can not figure out if she is subject to SE tax since she worked for a foreign company and was on salary.

In general, wages and salaries paid to an employee are not subject to SE tax, even if it is earned in a foreign country. The basic concept is that if it is not considered self-employment income in that country, then it isn't self-employment income for US tax purposes, either.

Some foreign countries may not distinguish between employee compensation and self-employment earnings. Most countries do have this distinction. Canada, the UK, Australia, and most of Europe all have something that resembles social security. But if the country doesn't have this distinction, it may be tough call as to whether the income is, or is not, self-employment. I suppose you could fall back on the various tests used by the IRS to determine whether someone is an employee or an independent contractor.

There are a few esoteric exceptions. Tim Geithner famously blew it when he was working for the IMF. Or some other international entity. He was an employee in a foreign country, but for that particular organization, the IRS has determined that US citizens DO have to pay FICA tax. But that's an exception--not the general rule. That's why Geithner credibly asserted that it was an honest mistake. TurboTax won't catch it.

As for EIC--

Your client does not have to exclude the foreign income. And I think the foreign income can qualify her for EIC. But the other requirements are still applicable. In order to get EIC, you have to have lived with the children, in the US, for more than half the year.

BMK

[ardi600]

thank koss, she does

have a w2 from a us source as well which will qualify her for eic. my concern was, could the IRS come back and say why did i not exclude the foreign income since she does qulify for the exclusion? I really have not read anywhere that a taxpayer has to exclude foreign income if he or she qualifies for it obviousely by not doing 2555, she will qualify for eic.