Publication 54 - Tax Guide For U.s. Citizens And Resident Aliens Abord - 2011 Page 17
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44net profits is $80,000. The entire $80,000 is
Royalties received by a writer are earned
not include the reimbursement for those ex-
unearned income.
income if they are received:
penses in your earned income.
The expenses for which you are reimbursed
•
For the transfer of property rights of the
Example 2. Assume that in Example 1 you
are not considered allocable (related) to your
writer in the writer’s product, or
spend time operating the business. Your share
earned income. If expenses and reimbursement
•
of the net profits is $80,000; 30% of your share
Under a contract to write a book or series
are equal, there is nothing to allocate to ex-
of the profits is $24,000. If the value of your
of articles.
cluded income. If expenses are more than the
services for the year is $15,000, your earned
reimbursement, the unreimbursed expenses are
income is limited to the value of your services,
Rental income. Generally, rental income is
considered to have been incurred in producing
$15,000.
unearned income. If you perform personal serv-
earned income and must be divided between
Capital not a factor. If capital is not an
ices in connection with the production of rent, up
your excluded and included income in determin-
income-producing factor and personal services
to 30% of your net rental income can be consid-
ing the amount of unreimbursed expenses you
produce the business income, the 30% rule
ered earned income.
can deduct. (See
chapter
5.) If the reimburse-
does not apply. The entire amount of business
ment is more than the expenses, no expenses
Example. Larry Smith, a U.S. citizen living
income is earned income.
remain to be divided between excluded and in-
in Australia, owns and operates a rooming
cluded income and the excess reimbursement
Example. You and Lou Green are manage-
house in Sydney. If he is operating the rooming
must be included in earned income.
ment consultants and operate as equal partners
house as a business that requires capital and
These rules do not apply to the following
in performing services outside the United
personal services, he can consider up to 30% of
individuals.
States. Because capital is not an income-
net rental income as earned income. On the
•
producing factor, all the income from the part-
other hand, if he just owns the rooming house
Straight-commission salespersons.
nership is considered earned income.
and performs no personal services connected
•
Employees who have arrangements with
with its operation, except perhaps making minor
their employers under which taxes are not
Income from a corporation. The salary you
repairs and collecting rents, none of his net
withheld on a percentage of the commis-
receive from a corporation is earned income
income from the house is considered earned
sions because the employers consider
only if it represents a reasonable allowance as
income. It is all unearned income.
compensation for work you do for the corpora-
that percentage to be attributable to the
tion. Any amount over what is considered a
Professional fees. If you are engaged in a
employees’ expenses.
reasonable salary is unearned income.
professional occupation (such as a doctor or
Accountable plan. An accountable plan is
lawyer), all fees received in the performance of
Example 1. You are a U.S. citizen and an
these services are earned income.
a reimbursement or allowance arrangement that
officer and stockholder of a corporation in Hon-
includes all three of the following rules.
Income of an artist. Income you receive from
duras. You perform no work or service of any
•
The expenses covered under the plan
the sale of paintings you created is earned in-
kind for the corporation. During the tax year you
must have a business connection.
come.
receive a $10,000 “salary” from the corporation.
•
The $10,000 clearly is not for personal services
The employee must adequately account to
Scholarships and fellowships. Any portion
and is unearned income.
the employer for these expenses within a
of a scholarship or fellowship grant that is paid to
reasonable period of time.
you for teaching, research or other services is
Example 2. You are a U.S. citizen and work
•
considered earned income if you must include it
The employee must return any excess re-
full time as secretary-treasurer of your corpora-
in your gross income. If the payer of the grant is
imbursement or allowance within a rea-
tion. During the tax year you receive $100,000
required to provide you with a Form W-2, Wage
sonable period of time.
as salary from the corporation. If $80,000 is a
and Tax Statement, these amounts will be listed
reasonable allowance as pay for the work you
as wages.
did, then $80,000 is earned income.
Reimbursement of moving expenses. Re-
Certain scholarship and fellowship in-
imbursement of moving expenses may be
Stock options. You may have earned income
come may be exempt under other pro-
TIP
earned income. You must include as earned
if you disposed of stock that you got by exercis-
visions. See Publication 970, Tax
income:
ing a stock option granted to you under an em-
Benefits for Education, chapter 1.
•
ployee stock purchase plan.
Any reimbursements of, or payments for,
If your gain on the disposition of stock you
nondeductible moving expenses,
Use of employer’s property or facilities. If
got by exercising an option is treated as capital
•
you receive fringe benefits in the form of the right
Reimbursements that are more than your
gain, your gain is unearned income.
to use your employer’s property or facilities, the
deductible expenses and that you do not
However, if you disposed of the stock less
fair market value of that right is earned income.
return to your employer,
than 2 years after you were granted the option or
Fair market value is the price at which the prop-
less than 1 year after you got the stock, part of
•
Any reimbursements made (or treated as
erty would change hands between a willing
the gain on the disposition may be earned in-
made) under a nonaccountable plan (any
buyer and a willing seller, neither being required
come. It is considered received in the year you
plan that does not meet the rules listed
to buy or sell, and both having reasonable
disposed of the stock and earned in the year you
above for an accountable plan), even if
knowledge of all the necessary facts.
performed the services for which you were
they are for deductible expenses, and
granted the option. Any part of the earned in-
Example. You are privately employed and
•
Any reimbursement of moving expenses
come that is due to work you did outside the
live in Japan all year. You are paid a salary of
you deducted in an earlier year.
United States is foreign earned income.
$6,000 a month. You live rent-free in a house
See Publication 525, Taxable and Nontax-
This section discusses reimbursements that
provided by your employer that has a fair rental
able Income, for a discussion of the treatment of
must be included in earned income. Publication
value of $3,000 a month. The house is not pro-
stock options.
521, Moving Expenses, discusses additional
vided for your employer’s convenience. You re-
rules that apply to moving expense deductions
port on the calendar-year, cash basis. You
Pensions and annuities.
For purposes of the
and reimbursements.
received $72,000 salary from foreign sources
foreign earned income exclusion, the foreign
plus $36,000 fair rental value of the house, or a
housing exclusion, and the foreign housing de-
The rules for determining when the reim-
total of $108,000 of earned income.
duction, amounts received as pensions or annu-
bursement is considered earned or where the
ities are unearned income.
reimbursement is considered earned may differ
Reimbursement of employee expenses. If
somewhat from the general rules previously dis-
Royalties. Royalties from the leasing of oil
you are reimbursed under an accountable plan
cussed.
and mineral lands and patents generally are a
(defined below) for expenses you incur on your
form of rent or dividends and are unearned in-
employer’s behalf and you have adequately ac-
Although you receive the reimbursement in
come.
counted to your employer for the expenses, do
one tax year, it may be considered earned for
Chapter 4 Foreign Earned Income and Housing: Exclusion – Deduction
Page 17
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