Foreign earned income exclusion

[appelman]

Is it allowable to choose to exclude a portion of one's foreign earned income?

[Lion]

It's a ratio based on qualifying days vs 365 days in the tax year.

[appelman]

Foreign earned income exclusion

My question is whether you can choose to exclude less than you're entitled to.

It's a ratio based on qualifying days vs 365 days in the tax year.

[Lion]

Don't know, but my burned out memory seems to think it's all or nothing. Would including all foreign income but taking the foreign tax credit accomplish the bottom line you're aiming for? Surely we have some preparing returns like this who have researched this situation....

[AZUKHiker]

All or Nothing

My question is whether you can choose to exclude less than you're entitled to.

No, it is all or nothing up to the s911 limit.

If the client worked in a country with higher tax rates than the US it is often better to claim the FTC rather than the exclusion.

[appelman]

But is there anything that says you can't adjust your 12-month period to reduce your exclusion?

[Lion]

The exclusion is based on the % of the tax year out of the country, so your answer is No. (You qualify via substantial presence by using 330 days out of the county out of any contiguous 365 days; it's those 365 days you can adjust, but only to qualify to use the exclusion for the tax year that you cannot adjust. Nor can you adjust the days you were actually out of the country after the fact; you could plan ahead, though.)

[AZUKHiker]

You Choose The 12 month Period

But is there anything that says you can't adjust your 12-month period to reduce your exclusion?

I see where you are coming from.

Yes, if you are using the Physical Presence Test you choose which 12 month qualifying period you are using for the test period. It is any 12 month period that starts or ends in the tax year and the s911 exclusion will be pro-rated based on the period you selected.

[Zee]

Timing of foreign earned income

I’m not sure why the original poster asked the question. So, it would be very helpful if the poster could explain the reason/motivation for the question and how it would benefit their taxpayer client if it were possible to exclude a portion of the foreign earned income exclusion amount.

Here’s an excerpt from a KPGM publication that might be helpful:

“In addition to the source of income, it is also necessary to determine when foreign earned income was earned, as opposed to when it was received – for example, a bonus that is paid in 2014 may have been earned in 2013 because it relates to prior year performance. The FEIE for the current year is used to offset foreign earned income that was used in the current year. If you work one year, but are not paid until the following year, in the year you are paid you can exclude the amount you could have excluded in the year the work was performed. However, you may not exclude any income related to a prior year’s services if the income is received more than one year after the year it was earned”.

[appelman]

Foreign earned income exclusion -- explanation

Taxpayer moved to Germany at the beginning of June 2013 and has lived and worked there ever since then. He is filing as Married Joint with 2 dependent children. 2014 income is about 50K. If he excludes all of it, he has no tax and no income to get the additional child tax credit. If he excludes none of it, he gets the 2K child credit, but his tax bill exceeds that. Excluding part of the income could bring him to where the tax is zero, but he still gets the full 2K of additional child tax credit. This would work, if he took his 12-month period to run from June 2013 to June 2014.

A question arises if he tried the same trick in 2015. Would he have to go back and amend 2014 to claim the full exclusion?

[Lion]

Apples and oranges. His tax period is the calendar year and his foreign income eligible to be excluded is the income earned out of the country during the tax period/calendar year. One way he can qualify to exclude foreign income is to be out of the country for 330 days out of any consecutive 365 period that begins or ends in the tax year/calendar year -- I think you're thinking about that period which qualifies him to use substantial presence. But, it doesn't change the amount of money he earned out of the country nor the tax year in which he earned it.

[David1980]

It's a good idea.

Basically, manipulating the physical presence test would affect the maximum earned income exclusion. The exclusion is not based on the number of days in a foreign country, but rather the number of days in the qualifying period that fall within the tax year. Take a peak at the 2555 line 38 "enter the number of days in your qualifying period that fall within your 2014 tax year". Then on line 39 you take the ratio of the number of days in the qualifying period divided by 365 to calculate the maximum exclusion for the year.

The IRS actually has an example in Publication 54 in choosing a date range to figure the maximum exclusion. http://www.irs.gov/publications/p54/...blink100047509

It's a common misconception that the exclusion is prorated by the number of days in a foreign country, whereas the truth is it's the number of days in the qualifying period that fall within the tax year. So if someone was abroad for the entirety of 02/01/13 - 01/31/14 you might be cheating them out of some exclusion if you only included 31 days in 2014 in calculating them the exclusion since they could actually have 61 days in the qualifying period in 2014 if you picked the right 12-month period for the physical presence test. Yes, the exclusion is still limited to foreign earned income - but if the prorated exclusion is less than the amount of foreign earned income you could potentially get a larger exclusion with 61 days in 2014 instead of 31.

Bringing that back to the original question - can they pick a 12-month period with the intent to reduce the amount of the exclusion? Is there any requirement that they choose the 12-month period that results in the largest exclusion?

[appelman]

From instructions to Form 2555

"Foreign earned income for this purpose means wages, salaries, professional fees, and other compensation received for personal services you performed in a foreign country during the period for which you meet the tax home test and either the bona fide residence test or the physical presence test."

This determines your entry on line 19. In my case, the taxpayer could meet the physical presence for the whole year, but enters on line 16 a 12-month period that covers only a portion of the year. The question boils down to whether the IRS can say that you do, in fact, meet the physical presence test for the whole year, even though only a portion of the year falls within the 12-month period that you select, and that you must therefore exclude your entire foreign earned income for the year.

[AZUKHiker]

Try Foreign Tax Credit

If your client is working in Germany and all of the $50K is earned income then surely claiming the Foreign Tax Credit is going to bring him down to zero tax and he gets the additional child tax credit?

In situations with higher tax rates than the US claim the FTC rather than claim the FEIC. Claiming the FEIC ties you in to using it for future years unless you elect out in which case you cannot use the FEIC again for 5 years without a PLR ($2,000 fee).

In rare situations claiming the FEIC might be beneficial to preserve NOLs etc.

[David1980]

Taxpayer moved to Germany at the beginning of June 2013 and has lived and worked there ever since then. He is filing as Married Joint with 2 dependent children. 2014 income is about 50K. If he excludes all of it, he has no tax and no income to get the additional child tax credit. If he excludes none of it, he gets the 2K child credit, but his tax bill exceeds that. Excluding part of the income could bring him to where the tax is zero, but he still gets the full 2K of additional child tax credit. This would work, if he took his 12-month period to run from June 2013 to June 2014.

A question arises if he tried the same trick in 2015. Would he have to go back and amend 2014 to claim the full exclusion?

I notice that in the 2015 instructions "What's new" for 1040 / 8812 it indicates you can not get the additional child tax credit if you're filing a 2555. Looks like this would no longer work for 2015.