Publication 54 - Tax Guide For U.s. Citizens And Resident Aliens Abord - 2011 Page 33
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44Deduction for
Example 3. Assume in Example 2 that both
the amount of the deduction(s) related to ex-
cluded income on line 44 of Form 2555.
capital and personal services combine to pro-
Foreign Income Taxes
If you have itemized deductions related to
duce the business income. No more than 30% of
excluded income, enter on Schedule A (Form
your net income, or $14,220, assuming that this
Instead of taking the foreign tax credit, you can
1040) only the part not related to excluded in-
amount is a reasonable allowance for your serv-
deduct foreign income taxes as an itemized de-
come. You figure that amount by subtracting
ices, is considered earned and can be excluded.
duction on Schedule A (Form 1040).
from the total deduction the amount related to
Your exclusion of $14,220 is 12.78% of your
You can deduct only foreign income taxes
excluded income. Generally, you figure the
gross income ($14,220 ÷ $111,300). Because
paid on income that is subject to U.S. tax. You
amount that is related to the excluded income by
you excluded 12.78% of your total income,
cannot deduct foreign taxes paid on earnings
multiplying the total deduction by a fraction, the
$8,166 (12.78 % of your business expenses), is
you exclude from tax under any of the following.
numerator of which is your foreign earned in-
attributable to the excluded income and is not
•
Foreign earned income exclusion.
come exclusion and the denominator of which is
deductible.
your foreign earned income. Attach a statement
•
Foreign housing exclusion.
to your return showing how you figured the de-
Example 4. You are a U.S. citizen, have a
•
Possession exclusion.
ductible amount.
tax home in Brazil, and meet the physical pres-
ence test. You are self-employed and both capi-
Example 1. You are a U.S. citizen em-
tal and personal services combine to produce
Example. You are a U.S. citizen and qualify
ployed as an accountant. Your tax home is in
business income. Your gross income was
to exclude your foreign earned income. Your
Germany for the entire tax year. You meet the
$146,000, business expenses were $172,000,
excluded wages in Country X are $70,000 on
physical presence test. Your foreign earned in-
and your net loss was $26,000. A reasonable
which you paid income tax of $10,000. You
come for the year was $116,125 and your in-
allowance for the services you performed for the
received dividends from Country X of $2,000 on
vestment income was $11,555. After excluding
business is $77,000. Because you incurred a
which you paid income tax of $600.
$92,900, your AGI is $34,780.
net loss, the earned income limit of 30% of your
You can deduct the $600 tax payment be-
You had unreimbursed business expenses
net profit does not apply. The $77,000 is foreign
cause the dividends relating to it are subject to
of $2,500 for travel and entertainment in earning
earned income. If you choose to exclude the
U.S. tax. Because you exclude your wages, you
your foreign income, of which $500 was for
$77,000, you exclude 52.74% of your gross in-
cannot deduct the income tax of $10,000.
meals and entertainment. These expenses are
come ($77,000 ÷ $146,000), and 52.74% of your
If you exclude only a part of your wages, see
deductible only as miscellaneous deductions on
business expenses ($90,713) is attributable to
the earlier discussion under Foreign taxes paid
Schedule A (Form 1040). You also have $500 of
that income and is not deductible. Show your
on excluded income.
miscellaneous expenses that are not related to
total income and expenses on Schedule C
your foreign income that you enter on line 23 of
(Form 1040). On Form 2555, exclude $77,000
Deduction for
Schedule A.
and show $90,713 on line 44. Subtract line 44
Other Foreign Taxes
You must fill out Form 2106. On that form,
from line 43, and enter the difference as a nega-
reduce your deductible meal and entertainment
tive (in parentheses) on line 45. Because this
expenses by 50% ($250). You must reduce the
You can deduct real property taxes you pay that
amount is negative, enter it as a positive (no
remaining $2,250 of travel and entertainment
are imposed on you by a foreign country. You
parentheses) on line 21, Form 1040, and com-
expenses by 80% ($1,800) because you ex-
take this deduction on Schedule A (Form 1040).
bine it with your other income to arrive at total
cluded 80% ($92,900/$116,125) of your foreign
You cannot deduct other foreign taxes, such as
income on line 22 of Form 1040.
earned income. You carry the remaining total of
personal property taxes, unless you incurred the
$450 to line 21 of Schedule A. Add the $450 to
expenses in a trade or business or in the produc-
In this situation (Example 4), you would
the $500 that you have on line 23 and enter the
tion of income.
TIP
probably not want to choose the for-
total ($950) on line 24.
eign earned income exclusion if this
On the other hand, you generally can deduct
On line 26 of Schedule A, enter $696, which
was the first year you were eligible. If you had
personal property taxes when you pay them to
is 2% of your adjusted gross income of $34,780
chosen the exclusion in an earlier year, you
U.S. possessions. But if you claim the posses-
(line 38, Form 1040) and subtract it from the
might want to revoke the choice for this year. To
sion exclusion, see Publication 570.
amount on line 24.
do so would mean that you could not claim the
The deduction for foreign taxes other than
Enter $254 on line 27 of Schedule A.
exclusion again for the next 5 tax years without
foreign income taxes is not related to the foreign
IRS approval. See
Choosing the Exclusion
in
tax credit. You can take deductions for these
Example 2. You are a U.S. citizen, have a
chapter 4.
miscellaneous foreign taxes and also claim the
tax home in Spain, and meet the physical pres-
foreign tax credit for income taxes imposed by a
ence test. You are self-employed and personal
Example 5. You are a U.S. citizen, have a
foreign country.
services produce the business income. Your
tax home in Panama, and meet the bona fide
gross income was $111,300, business ex-
residence test. You have been performing serv-
penses $63,900, and net income (profit)
ices for clients as a partner in a firm that pro-
$47,400. You choose the foreign earned income
How To Report
vides services exclusively in Panama. Capital
exclusion and exclude $92,900 of your gross
investment is not material in producing the part-
income. Since your excluded income is 83.47%
Deductions
nership’s income. Under the terms of the part-
of your total income, 83.47% of your business
nership agreement, you are to receive 50% of
expenses are not deductible. Report your total
the net profits. The partnership received gross
If you exclude foreign earned income or housing
income and expenses on Schedule C (Form
income of $232,250 and incurred operating ex-
amounts, how you show your deductions on
1040). On Form 2555 you will show the follow-
penses of $92,000. Of the net profits of
your tax return and how you figure the amount
ing:
$140,250, you received $70,125 as your distrib-
allocable to your excluded income depends on
•
Line 20a, $111,300, gross income,
utive share.
whether the expenses are used in figuring ad-
justed gross income (Form 1040, line 38) or are
•
You choose to exclude $92,900 of your
Lines 42 and 43, $92,900, foreign earned
itemized deductions.
share of the gross income. Because you ex-
income exclusion, and
clude 80% ($92,900 ÷ $116,125) of your share
If you have deductions used in figuring ad-
•
Line 44, $53,337 (83.47% × $63,900)
of the gross income, you cannot deduct
justed gross income, enter the total amount for
business expenses attributable to the ex-
$36,800, 80% of your share of the operating
each of these items on the appropriate lines and
clusion.
expenses (80% × $46,000). Report $70,125,
schedules of Form 1040. Generally, you figure
your distributive share of the partnership net
the amount of a deduction related to the ex-
cluded income by multiplying the deduction by a
In this situation (Example 2), you can-
profit, on Schedule E (Form 1040), Supplemen-
fraction, the numerator of which is your foreign
not use Form 2555-EZ since you had
tal Income and Loss. On Form 2555, show
TIP
earned income exclusion and the denominator
self-employment income and business
$92,900 on line 42 and show $36,800 on line 44.
of which is your foreign earned income. Enter
expenses.
Your exclusion on Form 2555 is $56,100.
Chapter 5 Exemptions, Deductions, and Credits
Page 33
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