Foreign income (Scenario)

[ILLMAS]

This question is for those that have experience with foreign income and deal with returns like this every year. Here is a scenario I would like to get help with, I am trying to find out if the return was filled out correctly.

• TP is U.S resident/citizen
• TP earns wages from his company that is located outside of the US (correction, his foreign wages was reported on line 7 combined with his US wages)
• TP has a rental property in the foreign country
• TP sold a business one of his business in the foreign country

From reviewing the tax return, I don't see the foreign earned income on Form 2555, assuming he filed a tax return, the rental property was reported on Sch E, what appears to be his wages appear on Sch C and the sale of the business on Sch D, any tax he paid is reported on form 1116. Is this the proper way of reporting foreign income? I don't deal with situations like this very often so I thought I would ask for help.

Thanks

MAS

[PatHack]

Although the facts are not clear from your post, I will add 2 cents....

You must determine the TP's tax home. Generally, this is the place where the TP works, which may be different than the TP's mailing address.

The source of the TP's wages is where the TP is standing/sitting when the TP performs the services for which the TP is paid. If the TP is a bona resident outside the USA or meets the physical presence test outside the US AND the TP's tax home is outside the US, then the TP may be able to exclude some of the foreign source earned income. The "wages" may appear on Sch C if the TP was an indep contractor. However, if the TP was an employee, the wages should be on Line 7 of the 1040 with "FEC" printed on the line (ATX does it automatically if you enter it on the FECSTMT).

Rental property in a foreign country is reported on Sch E, just like rental prop anywhere. However, beware that the depreciation rules require the use of the the Alt Depr System and longer lives for non-US based assets. Also confirm that the prop is owned by the TP, and not an entity.

As for selling the foreign biz....Sch D may be correct, but there may be issues depending upon the type of foreign company. The TP may also need to include a 5471, 8621 and/or 8938 (or possibly an 8865 if the entity was a partnership).

Good luck. It appears to be a difficult return to pick up w/o experience in the intl area.

[bertrans]

On the single issue of foreign earned income, a TP may elect to do one of three things: he may, if he meets the requirements, exclude that income (there are ceilings),on form 2555 ; he may elect to deduct the foreign tax he paid by filing form 1116;or, he may elect to deduct foreign taxes paid on Schedule A. There is one essential caveat: in general, one may not take a deduction from income that one has excluded.