Foreign income tax credit and NQ stock option

Hello,
I'm a foreign resident filing both foreign earned income exclusion and the
foreign tax credit. Normally I owe almost no tax in the US. Last year I
exercised an NQ stock option granted to me back during residing in the US.
I still work for the affiliate of the same US employer and our american
HQ sent me a 1099-Misc for the full amount of the gain. I understand that
only a portion of the NQSO gain is taxable in the USA as regular income
and must be excluded from the foregn tax credit. I have two questions:
1. How do I calculate this portion? I have seen two calculations:
the ratio (move date - grant date)/(total vesting period) OR
the ratio (move date - grant date) /(exercise date - grant date))
2. Do I have to only pay the income tax or must I also add social
security and the medicare taxes on it (Form 8919)?
Thank you in advance.
Misha
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Reply to
misha
foreign tax credit.
See the thread " International tax treatment of deferred tax bonus payments" in this newsgroup, especially towards the end. My questions there were about CA taxes on stock options granted while in CA, but you moved to another state and then exercised all the options. If you were granted options at the start of year 0, and exercised them at the start of year 5, but moved out of CA at the start of year 2, 40% of your gain is CA source income. This looks like your formula #1 above. The rule is different for other states.
The question is what rule does the federal government follow? If the same as CA, then 40% of your stock option income is also US source income. You would not pay taxes on this amount to your foreign country, and this amount should not be excluded by the foreign earned income exclusion. In other words, just put it on line 7 of form 1040. And this will carry over to the state tax return. The remaining 60% should I think be reported on your foreign tax return, on your federal return, and it should qualify for the foreign earned income exclusion as well as the foreign tax credit -- but that's my opinion.
What I saw once here in the US is an employee quit their job and then exercised their options. The employee did not withhold any taxes. However, the end of year W2 included the profits from exercise. So this went on line 7 of the person's 1040. So in essence they paid federal and state tax on the option profit, but no social security and medicare tax. Not sure if this is right, so hopefully others will comment.
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