US Citizen

[S T]

T/p US Citizen is living in Argentina, and has for years. She is now teaching English via the internet and being paid via PayPal.

Is she subject to US taxes on Worldwide Income via Internet?

Sandy

[BOB W]

ST> I don't see that the internet has anything to do with the issue. She is taxed on her world wide income period....................

[S T]

World Wide

I guess what is confusing is living abroad, would she have to separate sales as Foreign and US,

Or is she not eligible for foreign income exclusion?

How are internet sales treated?

Sandy

[Bees Knees]

Form 2555 instructions say the following:

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. It also includes noncash
income (such as a home or car) and
allowances or reimbursements.

It then goes on to explain what foreign earned income does not include, none of which apply in your situation.

It also says this:

Line 20. If you engaged in an
unincorporated trade or business in which
both personal services and capital were
material income-producing factors, a
reasonable amount of compensation for
your personal services will be considered
earned income. The amount treated as
earned income, however, cannot be more
than 30% of your share of the net profits
from the trade or business after
subtracting the deduction for one-half of
self-employment tax.
If capital is not an income-producing
factor and personal services produced the
business income, the 30% rule does not
apply. Your entire gross income is earned
income.

So it appears that foreign earned income is in reference to the taxpayer living in a foreign country earning wages, self employment for services only, etc. It does not appear to have anything to do with the source of where the sales originate.

Thus your client would appear to be allowed the foreign earned income exclusion on business income for services performed, even if some of the sales over the internet originate in the U.S. However, the earnings that would be considered dividend income (the capital of the business producing income) if the business were incorporated would not qualify. Teaching English would be considered a service, not something where capital would be a material income producing factor. Thus 100% of the income would be considered earnings from a service.