JOHN B. KENNEDY         TAX CONSULTANT          CORPORATE FINANCE 

(816) 942-6190​​​
312 E. Woodbridge Lane
Kansas City, Mo.  64145

​EMAIL:  jbkennedy@sbcglobal.net       WEBSITE:    jbkennedytaxconsultant.com
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FAVORABLE TAX TREATMENT OF FOREIGN EARNED INCOME

The geographical boundaries of  our economy are constantly expanding.  By employing United States citizens to work in other countries, corporations are using a strategy that they have found to maximize profits.  Economic conditions around the world such as supply and price of labor, supply and price of raw materials and other factors frequently cause factories and other businesses to be located overseas.  Defense contractors and other suppliers of services also employ tens of thousands of workers around the world. Few Americans realize that there are huge tax incentives for working overseas.  Our tax code contains a provision, the Foreign Earned Income Exclusion, that allows an exclusion of up to $92,900 annually of  income earned in other countries. 

WHAT IS FOREIGN EARNED INCOME?

 For exclusion purposes, foreign earned income includes salaries, wages, commissions, professional fees, and bonus for personal services performed while your tax home is in a foreign country and you meet either the foreign residence test or the physical presence test.  Earned income also includes allowances from your employer for housing or other expenses as well as the value of a car provided by the employer.  It may also include business profits, royalties, and rents provided this income is tied to the performance of services.  Earned income does not include pension or annuity income, annuities, dividends, interest, capital gains, or the value of tax-free meals and lodging. 
                                                                                                 
CLAIMING THE FOREIGN EARNED INCOME EXCLUSION

 If your tax home is in a foreign country and you meet either the foreign residence test or physical presence test, you may exclude up to $92,900 of foreign income earned in 2011.  You must file a U.S. return if your gross income exceeds the filing threshold for your personal status, even though all or part of your foreign earned income may be tax free.  The exclusion is not automatic, you must elect it. You elect the foreign earned income exclusion on Form 2555 which you attach to Form 1040.  There is also a housing cost exclusion which is also elected of Form 2555.
 As with all areas of our tax code, there are accompanying regulations which affect your tax liability.  Regarding the Foreign Earned Income Exclusion, there are three main areas which affect the exclusion. 

           1.  You may not claim business deductions allocable to the excluded income.
           2.  You may not make a traditional IRA contribution or a Roth IRA  contribution based on the excluded income.
           3.  You may not claim foreign taxes paid on or excluded income as a credit or  deduction.

 QUALIFYING FOR THE FOREIGN EARNED INCOME EXCLUSION

 You may elect the exclusion for foreign earned income only if your tax home is in a foreign country and you meet either the foreign residence test or the foreign physical presence test of 330 days.  If your tax home is in the U.S., you may not claim the exclusion but may claim the foreign tax credit and your living expenses while away from home if certain other tests are met.  If you are married and you and your spouse each have foreign earned income and meet the foreign residence or physical presence test, you may each claim a separate exclusion.
 Should you have any question regarding the foreign earned income exclusion or any tax issue, please contact my office.