Foreign Earned Income Worksheet

[WolfNoMate]

Can someone please explain the “foreign earned income worksheet” used to determine tax due (Form 1040, Line 44). Foreign earned income was tax exempt (up to $91,400 in 2009) as figured on Form 2555/2555-EZ.

2009 was a partial year of foreign earned income (FEI) and when I filed in Nov 10, the IRS took almost half the refund I thought I was getting. 2010 will be a full year of FEI and is going to cost me over $1000 using this worksheet.

I used the tax tables (1040 Instructions, Pg 74+) to determine taxes due on non-FEI shown on Form 1040, Line 43. Was this incorrect and should I have used the “foreign earned income worksheet” for 2009?

Is there a box I checked/didn’t check that triggered the use of this form?

Should I have used a 2555 instead of the 2555-EZ for 2009 (partial year)?

Other info: No penalties or interest due, no late filing charges, qualified for FEI exemption (335 days)

Form 1040 line #’s and amounts for ref:
Line 7 – 59,201, Line 8a – 651, Line 9a – 42, Line 9b – 42, Line 12 – 1,041 (Schd C-EZ), Line 16b – 22,247,
Line 21 - (7,411), Line 22 – 75,933, Line 27 – 74, Line 38 – 75,859, Line 40a – 12,847, (40b checked),
Line 41 – 63,012, Line 42 – 7,300, Line 43 – 55,712

Per the tax tables Line 43 = 7524
Per the foreign earned income worksheet Line 43 = 7881

2009 was my first year with FEI so I am new to this area in the tax world.

[mwcpa]

the foreign earned income exclusion is allowed up to the 91,400 number you note, but it is pro rated to the portion of the year one works on a foreign assignment and only the foreign income can be excluded....

simple, simple example...

you make 100K on a foreign assignment in 2009.... the assignment starts on 7-1-09 and continues through today... prior to the move to the foreign country you made 75K in the US... you also earned interest income of 10K in 2009....

The 10K of interest is not exclude
The 75K of US salary is not exclude
The 100K of foreign wages, assuming all of the rules are met and excluding any allowable housing costs, is computed as follows (I am using whole months, not days for ease)

Wages earned on foreign assignment 100,000
Allowable annual exclusion for a year 91,400
Portion of the year on assignment 50%
Maximum allowable exclusion for 2009 = 45,700
Salary earned on foreign assignment that can be fully taxed by the US 53,400

So, in my example. the AGI is 139,300

(Also, to add.... if your foreign income in my example was say 40,000.... then you can only exclude the lesser of the allowable amount, 45,700 in my example, or the amount actually earned..... so the excluded amount here would be 40K, the actual amount paid on foreign assignment)

__________

I really cannot make sense of the $$ you noted as the information is insufficient.... it may be time for a tax pro to review the 2009 return that you prepared and compare that to the findings/opinion of the IRS...

Line 7, wages 59,201 (are these US sourced? Foreign sourced? how many days where you on assignment in 2009? did you pay tax to the foreign country?)
Line 8, interest 651 (not eligible for the exclusion)
Line 9, dividends 42 (not eligible for the exclusion)
Line 12, schedule C 1,041 (is this a US business, a foreign operation?)
Line 16, pension 22,247 (generally not eligible for the exclusion)
Line 21, 7,411, is this your calculation of the income exclusion?

[rangerj]

There are also other possibilities to be considered, such as Modified AGI that INCLUDES the excluded foreign EARNED income and the AMT (possibly). Ditto, see a tax professional with foreign tax experience.

[WolfNoMate]

To help clarify the numbers I provided:

Line 7, wages 59,201 (are these US sourced? -- Yes, all US sourced
How many days where you on assignment in 2009? -- 48, i.e. 48/365 as per Form 2555
Did you pay tax to the foreign country? -- No
Line 8, interest 651 (not eligible for the exclusion) -- understood
Line 9, dividends 42 (not eligible for the exclusion) -- understood
Line 12, schedule C 1,041 (is this a US business, a foreign operation?) -- US business (spouse)
Line 16, pension 22,247 (generally not eligible for the exclusion) -- understood
Line 21, 7,411, is this your calculation of the income exclusion? -- No, total FEI for 2009
The income exclusion for the 48 days would be 12,065. -- 48 / 365 = .132 * 91400 = 12,065 as per the Form 2555.

Taxes were filed in Nov 10 to meet the 330 day outside the US requirement.

[WolfNoMate]

Here is a copy of the online "Details" page from IRS.

Details:
We changed the amount of tax on Line 44 of your Form 1040. Entries on your return indicate that you should have used the Schedule D Tax Worksheet or Qualified Dividends and Capital Gain Tax Worksheet to compute your taxes. It appears your taxes were not computed using one of these worksheets or were computed incorrectly.

NOTE:
The tax rates used on the Schedule D Tax Worksheet or the Qualified Dividends and Capital Gain Tax Worksheet are generally lower than the standard rates. However, if the refigured tax amount is higher than the tax amount shown on your return then an error was made in the original computation of your tax.

Please read the following information related to your tax situation:

• Schedule D Instructions, See Schedule D Tax Worksheet, page D-10
• Form 1040 Instructions, Qualified Dividends and Capital Gain Tax Worksheet, page 37
• Tax Topic 404 - Dividends
• Publication 544, Sales and Other Dispositions of Assets
• Tax Topic 409 - Capital Gains and Losses
• Understanding Your IRS Notice

[WolfNoMate]

Thank You mwcpa and rangerj for your help/previous replies.

I am working in the Middle East and "tax pro's" are hard to come by over here.

I will be in the states in Apr on vacation, but that is tax time and most tax pro's are booked to the hilt then.

I am planning to call the IRS, but wanted to get the input/opinion of "others more knowledgeable than I on tax matters" to see if perhaps:

1. I made a mistake, i.e. used wrong form or didn't use/include a form I should have.

2. The IRS made an error.

[mwcpa]

based on your post you have ZERO foreign earned income reported on line 7.

the foreign earned income exclusion is for income earned in the foreign country, not earned in the US....your computation for line 21 excludes the income earned on the foreign assignment but line 7 did not include such income to be excluded.

Line 7 (wages) should include the income earned in the foreign county. so here it should be your US wages of 59201 + the income earned on the foreign assignment 7411 to total 66612, and then you exclude the amount you computed on form 2555 on line 21.

Again, you seemed to have not included the foreign income but then you excluded it.

The error lies in the fact that line 7 should be the total of US and foreign wages, not just US wages.

You cannot take an exclusion for income you did not report.... and you need to report the foreign income if you are a US citizen (the law requires US citizens to report all income from all sources)

[mwcpa]

based on your post your tax form should look like this (through total income on line 22)

Line 7, wages 59,201 + 7411 = 66,612
Line 8, interest 651
Line 9, dividends 42
Line 12, schedule C 1,041
Line 16, pension 22,247
Line 21, your allowable exclusion on 2555, assuming your math of the maximum allowed being equal to 12,065, but you are limited to actual foreign earned income (7,411)
Line 22, total income 83,182 (based in the amounts above)

You note line 22 as being reported as 75,933

That is where the error lies.

[WolfNoMate]

mwcpa, sir, I owe you an apology. I am sorry, it appears I wasted some of your time.

I misspoke when I stated that Line 7 was all US income. The 59,201 DOES include my 2009 FEI. I was at work and did not have the detailed info I used to figure my taxes when I answered your post.

I have double checked the rest of the posted info and it is correct.

If I could impose upon you, please review pg 35 of the 1040 instructions. If I am understanding it correctly, I must use the Foreign Earned Income Worksheet based on column 2, para 2 and column 3, para 1.

Again, thank you for time and assistance.

[mwcpa]

your math still does not add up...

Line 7, wages 59,201 (which includes the 7,411 of foreign income)
Line 8, interest 651
Line 9, dividends 42
Line 12, schedule C 1,041
Line 16, pension 22,247
Line 21, your allowable exclusion on 2555, assuming your math of the maximum allowed being equal to 12,065, but you are limited to actual foreign earned income (7,411)
Line 22, total income 75,771 (based in the amounts above)

You note line 22 as being reported as 75,933

You still have math errors based on your facts.

________

For giggles I took the total income (line 22, for tax guys like me lines make it difficult, call it what it is in the future, forms and lines change all the time) as you noted 75,933
Less the 1/2 SE tax 74 (my computation based on your wife's schedule C income)
Reduce that by your itemized deduction of 12,847 and your personal exemptions (i assume you and a spouse only) of 7,300
end up with taxable income of 55,712

The calculation of tax under the foreign earned income tax rules for 2009 is 7,883 (tax on your taxable would be 7,516, I assumed no AMT)
SE tax is 147
Total tax is 8,030

You figure your tax as if there was no foreign exclusion (that would be 8634, but you have qualified dividends, so that gets reduced to 8626) then you reduce that amount by the tax on the foreign income (starting at the lowest rate and going up or 743)... here that adds up to 7883

See a pro, as you are doing something wrong if you do your returns by hand (something you noted on the forms filed is incorrect or inconsistent with the facts) or you entered your 2009 data into TT wrong...that is where the error lies as you came up with a number very close to mine (I have 1/2 the facts at best), something disclosed does not agree to the position you are taking.

[WolfNoMate]

Thank You very much, sir. I believe you have answered my questions. Your time and expertise are most appreciated.