# Foreign Earned Income Exclusions



## ting33 (Mar 25, 2015)

I'm desperately trying to finish my returns for the Streamlined Procedures -U.S. Taxpayers Residing Outside the United States and I'm stuck!

Of the 3 prior years I have 1 year to file with employed income, another just with self employed and one year with both...

On the 1040 - Is line 7 'Wages' for Income I earn on a UK P45?

Do I need to file a Schedule C for self employed income? - I thought paying tax in the uk (social security tax treaty) on this I wouldn't need to be taxed for social security etc

Don't I need to just use 2555 for all the income - as my amounts fall within the thresholds for exclusion, I dont earn income from the US only here!?

Tax Slayer sometimes stops me from entering foreign addresses in details about employers in the UK which can prevent completing some forms- if I printed them off and amended them with writing is that allowed?

Help!


----------



## Bevdeforges (Nov 16, 2007)

ting33 said:


> On the 1040 - Is line 7 'Wages' for Income I earn on a UK P45?


Not sure what's included on a UK P45, but generally speaking, no. Wages for US tax purposes are your gross earnings - before any deduction of tax, social insurance or any other "adjustments" the UK may do to arrive at "taxable income."



> Do I need to file a Schedule C for self employed income? - I thought paying tax in the uk (social security tax treaty) on this I wouldn't need to be taxed for social security etc


Opinion on this is split, but if your income from your business falls well within the FEIE provisions, I would just include it as "salary" - both on the 2555 and on line 7. Some folks insist you must include gross revenue on the 2555 and then file a Schedule C - but frankly, how the heck are they going to know the difference? (While my work actually isn't "self-employment" due to how our company is set up, I just list our company as my employer, with our home address as the employer's address and they haven't questioned it in the last 15 years.)



> Don't I need to just use 2555 for all the income - as my amounts fall within the thresholds for exclusion, I dont earn income from the US only here!?


Only for the "earned" income - which includes both salary and your income from your self-employment. Any bank interest or other "unearned" income goes directly on the 1040.



> Tax Slayer sometimes stops me from entering foreign addresses in details about employers in the UK which can prevent completing some forms- if I printed them off and amended them with writing is that allowed?


Haven't used Tax Slayer, but on TaxAct, you have to use a separate little "form" to enter certain types of income - particularly salary income. Don't use the W-2 form to enter a foreign employer - check to see if there is an option to enter income from a foreign employer and use that. It should allow for a foreign address. (It actually goes onto a separate little electronic "form" required by the IRS e-file service.)

If you can't find the option (scroll down from the list that offers you the chance to fill out a W-2 - even if it looks like you have the entire list on your screen), then yes, print it out and fill in the information by hand, if you have to. It's just that you won't be able to e-file.

Sounds like you're heading into the home stretch. Courage! It's almost done.
Cheers,
Bev


----------



## ting33 (Mar 25, 2015)

I'm sorry I don't understand why I would need to add info for line 7 wages if I'm doing so on line 27 as Other Income/2555 - wouldn't they double up the amounts?
I thought 2555 excludes me from any liabilities as my amounts are below the thresholds? That I wouldnt need to add schedule C or SE even, as your saying it can all fall under salary in the 2555?


----------



## Bevdeforges (Nov 16, 2007)

If you read through to the end of form 2555, one of the last lines on the form (depends on which 2555 you use - plain or EZ) says to subtract line x from line y and then "Enter the result here and in parentheses on Form 1040, line 21. Next to the amount enter "Form 2555." On Form 1040, subtract this amount from your income to arrive at total income on Form 1040, line 22."

That's how you avoid double counting it. Form 2555 is just the back-up (i.e. justification) for why you subtract some amount from what you reported on lines 7 and whatever. Ultimately form 1040 is your tax declaration in full. Any other forms basically just support the numbers you're adding and subtracting on form 1040.
Cheers,
Bev


----------



## ting33 (Mar 25, 2015)

So you still have to fill out line 7 for employed income, and line 12 for self employed income + schedule C - even if your using 2555/2555EZ to exclude your income as a permanent resident in the UK?

Doesnt this make you liable for tax on self employed income? I thought you mentioned somewhere entering all foreign income - as wages/salary combined and using it on 2555 would be ok?

Sorry I was told there is some tax treaty between the US/UK, you get a certificate of exemption from HMRC and if your within the allowed income threshold theres no tax?!

Thanks for your patience! Its all so confusing!


----------



## Bevdeforges (Nov 16, 2007)

Honestly, I'd combine the salary income and the "self-employment" income on the form 2555 (i.e. like you had two employers). Then put the total income together on line 7, skip the Schedule C altogether, and then subtract the "excluded" amount on form 1040, line 22.

As long as you are properly registered with HMRC (or whoever) to pay your social insurances for your self-employment activity, you're covered for purposes of the SE form and liability for "self employment tax" - it's a good idea to have the certificate for that if you can get it. But don't forget there are two different treaties - one involving income tax and the other for "social security". Self employment tax in the US is actually "social security" (and mostly retirement at that).
Cheers,
Bev


----------



## BBCWatcher (Dec 28, 2012)

Ting33, I think Bev has explained this specific example well, but just to help you avoid being confused, _as a general rule_ the IRS wants you to report all income. _Then_ you take deductions, exemptions, credits, etc. that you qualify for. Transparency is the general rule.

So the FEIE works exactly like this. Form 1040 Line 7 is "big" (and truthful), and then the FEIE puts a negative number (typically) elsewhere on the form. Likewise, if you've got self-employment income you report it (at least in Line 7 and perhaps elsewhere), but whether that income is _taxable_ is a separate matter. (The U.S.-U.K. social security treaty determines that in your case, as Bev notes.)

"Headline" gross income first, then "details" second, in other words -- a very basic, practically universal principle in U.S. tax and financial reporting. Most other countries do the same thing, actually. If you keep that basic principle in mind you'll probably get things right.

OK, that's the general principle. Now let me provide a couple exceptions -- and they're explained in the instructions rather well. If, for example, you receive a scholarship or fellowship, the IRS explains what amount of that scholarship or fellowship you report and what part you don't. (That's explained in IRS Publication 970.) As another example, if you receive $1000 from your grandmother as a gift, you don't generally have to report that. Having no reporting requirement doesn't mean you shouldn't keep personal records. (You should.)


----------

