# Foreign earned income and exemption



## Transplant_DK

Hi everyone! 

I have read forms and instructions until my eyes are crossed and cannot seem to find the answer to what I know is a very straightforward and simple question. I'm sure it's been asked and discussed here as well, but I think I have some mental block thing going whenever I try to get my US taxes filed. 

Anyway, my question: When reporting foreign earned income, and/or figuring the exemption and even figuring out which forms to use--do I use my total income or my after tax income? I have lived and worked in Denmark for years, and have almost no US income (a very small amount of stock interest). I pay full Danish taxes, and I know there is an agreement between the US and DK so that taxpayers don't end up paying double. I just don't know where the taxes paid part comes in (i.e. does it come off the top, so that the exemption amount covers the after tax income) or do I subtract it later using still another form. 

From what I understand, I will be filing a 1040 and a 2555 (or 2555 es, or maybe both?). Also, I have a DK bank account (with my Danish husband, who I won't be claiming on my US taxes), so I assume I also need to file the FBAR form. 

Any suggestions would be very, very appreciated. I get literally sick to my stomach whenever I start reading the instructions


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## Bevdeforges

It's actually fairly easy until you get into fancy investment arrangements.

If you're earning a living and getting paid salary of some sort (most sorts of self-employment count as "salary") start with the *form 2555*. (There is an EZ version of 2555, which you can use if you meet the requirements on the top of the form. Either one works, though.)

Report your earned income gross (i.e. salary before any tax or deductions for social insurances or anything else). As long as you have been in Denmark for a full year, you wind up exempting your full salary up to $92,900. Just follow the instructions on the form and at the end, they tell you how to report the figures on your *form 1040*. (You have to file a long-form 1040 if you're taking the exclusion.)

List your bank accounts that pay interest on the *Schedule B *(since you have to file the Schedule B anyhow to tell them you'll be filing an FBAR) and add up the interest income there. Again, the form tells you which line on the 1040 to put the total interest income. (On a joint account, I would claim no more than one-half the interest paid last year on your joint account.)

On the front page of the long-form 1040, if you do what they tell you to do, your *"AGI" (Adjusted Gross Income) *should be no more than the interest income. Turn the 1040 over and just follow the instructions there. Unless you've got lots of interest income (and if so, please tell me where you're doing your banking!) you then take the standard deduction and your personal exemption against your interest income. That knocks out $9500 of interest income from your "taxable income" and your taxes due should be $0 unless you've got more income than that coming in from somewhere. (I'm assuming that you're filing "married, filing separately").

If you still have taxable income left over at that point, then you need to use *form 1116 *to claim a credit for taxes paid in Denmark - but allocating what you've paid to which kind of income is a pain and best avoided if you can.
Cheers,
Bev


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## Transplant_DK

Thanks! I will follow your advice and see if I can get a bit farther. I know 80% of my problem is feeling overwhelmed way too early on. Unfortunately, I'm pretty sure I'll need to file the 1116 for the past few years now because of the exchange rate.


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## Bevdeforges

Transplant_DK said:


> Thanks! I will follow your advice and see if I can get a bit farther. I know 80% of my problem is feeling overwhelmed way too early on. Unfortunately, I'm pretty sure I'll need to file the 1116 for the past few years now because of the exchange rate.


Do all the other forms first and see whether or not you actually owe any taxes before you start to worry about the 1116. You'll wind up leaving most of the lines blank on the 1040.

The exchange rates to use for the year are here: Yearly Average Currency Exchange Rates and take a scan through the pamphlet posted on the Paris IRS office website: http://photos.state.gov/libraries/france/5/irs/2011taxbooklet.pdf It's actually quite a bit more helpful than the IRS's official pamphlet for overseas taxpayers: http://www.irs.gov/pub/irs-pdf/p4732.pdf
Cheers,
Bev


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## RødGrød

Hej Transplant_DK

I find that this guide explains things very well.
The Expat's Guide to US Taxes (last updated in 2009).


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## havgap

Hello Bev

I would like to ask a question about your information above:

"If you're earning a living and getting paid salary of some sort (most sorts of self-employment count as "salary") start with the form 2555. "'

The rules in Finland for self employed / small business are quite different, so would one have to caluculate all expenses under American rules? for example depreciation schedules? to arrive at the 2555 figures? 

Thanks


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## Bevdeforges

havgap said:


> Hello Bev
> 
> I would like to ask a question about your information above:
> 
> "If you're earning a living and getting paid salary of some sort (most sorts of self-employment count as "salary") start with the form 2555. "'
> 
> The rules in Finland for self employed / small business are quite different, so would one have to caluculate all expenses under American rules? for example depreciation schedules? to arrive at the 2555 figures?
> 
> Thanks


It depends a bit on what you mean by "self-employed" in Finland. Yes, ultimately you have to determine your income based on the US rules. However, if your business in Finland is some sort of registered company (even a small business sort of registration) where you pay yourself a "salary" of some sort, you may not have to calculate all the expenses. 

If your income is the results from your business, then you may need to report the results of your business on a Schedule C (instructions for Schedule C are here: http://www.irs.gov/pub/irs-pdf/i1040sc.pdf ) and I believe there is also a Schedule C "EZ" which is a short form for sole proprietorships with expenses under $5000.

You don't absolutely have to go through all the hoops in reporting your business results, like you would if you were in the US. Report your business expenses against your business income to the point where you show net income that is "reasonable" for your personal services to the business. (The IRS definition of what self-employment income is eligible for the exclusion.) If you don't need depreciation tables and all to get to that point, don't mess with them.
Cheers,
Bev


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## havgap

Ok, thanks for the advice : - )


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## rivka88

My income has been divided between 

1.Quebec Pension payments (contributed plan),

2. Canada Old Security (non-contributing),

3. Garrantied Income Supplemnt (non-contributing, analgous to social security supplements)

4. and earned income from miscellaneous cash payments, reported as other income on Canadian and Quebec tax returns

how should I report these items on a US return, is item #4 considered salary or self-employment?


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## Transplant_DK

Thanks again for all the help! I've finally taken the plunge and am trying to start with the current year. The expat's guide is really helpful, but I still I have another question--do I really have to figure out how much of my (foreign paid) salary I received while I was in the US or visiting other countries for work?! 

I travel on a limited basis for conferences, all of which is paid for (including my regular salary) by my Danish employer. So, I'm not earning money while in the US per se. It looks like payments for services in the US are supposed to be entered on the 1040 (not the 2555), but that doesn't make sense if this was a part of my regular monthly salary. 

I'm hoping I can get away by entering NA or 0 for money earned while on those trips...


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## makaloco

Transplant_DK said:


> I travel on a limited basis for conferences, all of which is paid for (including my regular salary) by my Danish employer. So, I'm not earning money while in the US per se. It looks like payments for services in the US are supposed to be entered on the 1040 (not the 2555), but that doesn't make sense if this was a part of my regular monthly salary.


I had the same situation when I was working. On Form 2555, Part II 14c-d, I used to fill in the number of days spent in the US on business and use $0 for the amount of money earned there. In the absence of specific instructions for those lines, my reasoning was that my foreign salary would have been paid whether or not I attended the conferences, and while I was reimbursed for expenses, I received no extra pay for attending. All of my salary was reported on Form 1040 and excluded on Form 2555. I can't guarantee that this was correct, but I did it for about 13 years, and no one ever questioned it.


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## Transplant_DK

makaloco said:


> I had the same situation when I was working. On Form 2555, Part II 14c-d, I used to fill in the number of days spent in the US on business and use $0 for the amount of money earned there. In the absence of specific instructions for those lines, my reasoning was that my foreign salary would have been paid whether or not I attended the conferences, and while I was reimbursed for expenses, I received no extra pay for attending. All of my salary was reported on Form 1040 and excluded on Form 2555. I can't guarantee that this was correct, but I did it for about 13 years, and no one ever questioned it.


Thanks! That's what I was thinking--that they are interested in people doing business/making money in the US, not ones who are there as part of the normal salary. 

On to another question: the paperwork I get from my Danish employer shows the total earned in 2011, and there are some normal deductions from that for labor market fund, retirement, etc. When I report my total income, before subtracting the foreign earned income credit, is it the total amount or do I reduce it by the money paid into retirement? 

It looks like I'm going to have to do the foreign tax exclusion paperwork afterall--the foreign earned income exclusion doesn't cover my salary. Would I then deduct all of my foreign paid taxes, the labor market payment, retirement, etc on form 1116?


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## Bevdeforges

Transplant_DK said:


> Thanks! That's what I was thinking--that they are interested in people doing business/making money in the US, not ones who are there as part of the normal salary.
> 
> On to another question: the paperwork I get from my Danish employer shows the total earned in 2011, and there are some normal deductions from that for labor market fund, retirement, etc. When I report my total income, before subtracting the foreign earned income credit, is it the total amount or do I reduce it by the money paid into retirement?
> 
> It looks like I'm going to have to do the foreign tax exclusion paperwork afterall--the foreign earned income exclusion doesn't cover my salary. Would I then deduct all of my foreign paid taxes, the labor market payment, retirement, etc on form 1116?


I'd do it like makaloco suggests - particularly if you're claiming the FEIE based on "bona fide resident" rather than "physical presence" (but in truth, I'd do it that way either way and see if it flied).

Do NOT subtract the Danish deductions from your gross salary. Most countries let you deduct social insurances and such from your pay to get "taxable income." The US doesn't let you do this - you have to report it gross.

Check Pub 54 for the details on how to apportion your deductions against your income for form 1116. You can only take Danish taxes paid (and only income taxes - not any social insurances or retirement) against the part of your income that is not excluded. It's tricky, but there are a couple examples in pub 54 that show you how to do it.
Cheers,
Bev


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## Transplant_DK

Bevdeforges said:


> I'd do it like makaloco suggests - particularly if you're claiming the FEIE based on "bona fide resident" rather than "physical presence" (but in truth, I'd do it that way either way and see if it flied).
> 
> Do NOT subtract the Danish deductions from your gross salary. Most countries let you deduct social insurances and such from your pay to get "taxable income." The US doesn't let you do this - you have to report it gross.
> 
> Check Pub 54 for the details on how to apportion your deductions against your income for form 1116. You can only take Danish taxes paid (and only income taxes - not any social insurances or retirement) against the part of your income that is not excluded. It's tricky, but there are a couple examples in pub 54 that show you how to do it.
> Cheers,
> Bev


I just found this on the irs site, which makes me think that payments for the retirement and labor market fund are not included in the total foreign income figure: 

Amounts Not Included In Foreign Earned Income 

The previously excluded value of meals and lodging furnished for the convenience of your employer
*Pension or annuity payments including social security benefits*
Pay you receive as an employee of the U.S. Government
*Amounts included in your income because of your employer's contributions to a nonexempt employee trust or to a nonqualified annuity contract*
Recaptured unallowable moving expenses
Payments received after the end of the tax year following the tax year in which you performed the services that earned the income


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## Bevdeforges

Transplant_DK said:


> I just found this on the irs site, which makes me think that payments for the retirement and labor market fund are not included in the total foreign income figure:
> 
> Amounts Not Included In Foreign Earned Income
> 
> The previously excluded value of meals and lodging furnished for the convenience of your employer
> *Pension or annuity payments including social security benefits*
> Pay you receive as an employee of the U.S. Government
> *Amounts included in your income because of your employer's contributions to a nonexempt employee trust or to a nonqualified annuity contract*
> Recaptured unallowable moving expenses
> Payments received after the end of the tax year following the tax year in which you performed the services that earned the income


"Pension or annuity payments" means benefits being paid to you as retirement from the fund. It doesn't refer to the payments you are making to qualify for an eventual pension.

And the second item you've highlighted refers to payments your employer makes out of his own funds - not payments he is transferring on your behalf from your gross pay. What it means is that you don't have to add to your gross salary any amounts the employer is paying (like "matching funds" or the "employer portion" of social security payroll taxes).
Cheers,
Bev


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