Foreign income - my son is living and working in Japan

[bookkeeper]

Hi there,

I am looking for a little advice.  My son began a job in Japan last August.  This was his first real job after graduating last May.

He earned about $1000 at his part time job before he graduated in 2014.
He earned about $13,000 at his full time job in Japan in 2014.

He has filed the forms with the IRS informing them that he is working and living out of the country.  Since he had tuition, fees and book expenses for a semester in 2014, I am suggesting that he file and claim all his income, foreign and domestic, this year.  He will not owe any tax since his income is so low and he gets to deduct his education expenses.

Is there any down side to waiting until next year to exclude the first $80,000 of foreign earned income?  He will have to file several extensions to meet the test of days living abroad for the 2014 tax year.  It seems like a lot of hoops to jump through to get to the same outcome.

He has given me power of attorney to complete his tax forms for him.  Does anyone have experience with filing tax forms for people living and working in another country?

[The Captain]

I am not an individual tax expert.  I used to administer an in-pat ex-pat program over 15 years ago so I have some limited knowledge in this area.

The foreign income exclusion re-sets every year so it's not a lifetime limit.  I also think your income amounts may be a little out of date.

The below is from the US master tax guide, kind of a cliff notes for tax.  My advice is worth exactly what you're paying for it, but my instincts tell me you are correct.  As long as he has zero tax liability claiming the foreign earned income exclusion gets no benefit for a lot of work this year.

Hope this helps.


~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

U.S. Master Tax Guide® (2015),2402.Foreign Earned Income Exclusion


Related Information – Federal


A qualifying individual ( ¶2404) who lives and works abroad may elect ( ¶2408) to exclude from gross income a certain amount of foreign earned income attributable to his or her residence in a foreign country during the tax year ( Code Sec. 911(a)(1) and (b)(2)). 1 The maximum amount of foreign earned income that may be excluded is $99,200 for 2014 ($100,800 for 2015) ( Rev. Proc. 2013-35; Rev. Proc. 2014-61). The exclusion is computed on a daily basis. Therefore, the maximum limit must be reduced ratably for each day during the calendar year that the taxpayer does not qualify for the exclusion. The exclusion is also limited to the excess of the individual's foreign earned income for the year over his or her foreign housing exclusion ( ¶2403). In the case of married taxpayers, each spouse may compute the limitation separately and without regard to community property laws (if otherwise applicable). Thus, it is possible for a married couple to exclude up to $198,400 for 2014 ($201,600 for 2015) if each spouse is qualified to claim the exclusion ( Reg. §1.911-5). 2

Example 1
Andy is a U.S. citizen who qualified as a bona fide resident of Costa Rica for all of 2013 and who received $78,000 in salary for work he did in Costa Rica. Assuming he claimed no foreign housing exclusion, Andy was able to exclude all of the salary from his gross income for 2013. Andy continues to work in Costa Rica until October 31, 2014, when his employer permanently reassigns him to the United States. During this time, Andy received a salary of $90,000 for his work in Costa Rica in 2014. Assuming he claimed no foreign housing exclusion, the maximum amount of foreign earned income he can exclude from his gross income in 2014 is $82,621 ($99,200 multiplied by ratio of the number of days he was a bona fide resident of Costa Rica ( 304/365).

Foreign Earned Income. Foreign earned income includes wages, salaries, professional fees, and other amounts received as compensation for personal services actually rendered when the taxpayer’s tax home was located in a foreign country and the taxpayer meets either the bona fide residence or physical presence test ( Code Sec. 911(b)(1) and (d)(2); Reg. §1.911-3). 3 If the taxpayer engages in a sole proprietorship or partnership where both personal services and capital are material income-producing factors, no more than 30 percent of the taxpayer’s share of the net profits can be treated as earned income (30 percent of gross profits if no net profits). Any salary received from a corporation is earned income to the extent it represents reasonable compensation for personal services performed.