Revocation of Foreign Income Exclusion

The option for foreign income exclusion (Form 2555) is allowable unless revoked, when the revocation is for five years unless permission to end it sooner is received. Revocation can be by the filer's request, or by using the foreign tax credit for income that could have been covered by exclusion. What if neither the exclusion nor foreign tax credit is used? This year my daughter is in a situation that she would come out ahead if she did not use any foreign exclusion or credit, but filed normally including Schedule M. Does that revoke the foreign income exclusion for the next four years as well?

Reply to
Larry Israel
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Are you saying that if you use the FEIC then the AGI is less than 75 and you get the full credit?

Reply to
removeps-groups

I believe revocation requires an overt act. That would be attaching a statement to the return or filing a return that used the other method (switching from FTC to exclusion or vice versa). Revocation implies a change to the other method. Failure to use either method merely maintains the status quo.

Reply to
Alan

No, what I am saying is that she does not want to use the FEIC as that would tie her down for five years. And using the exclusion would result in more tax than not using and filling out Schedule M. So I wanted to know if not using the exclusion is has the same effect as revoking it.

Reply to
Larry Israel

Can't you use Schedule M even if you take the FEIC?

Reply to
removeps-groups

As I read the instructions from Schedule M and do the calculations, if all the earned income is excluded then the credit from Schedule M is zero. If your tax without taking the exclusion is less than the credit you would get from Schedule M, you would be better off using Schedule M. Or so I read it.

Reply to
Larry Israel

Line 1 = Per the directions on Schedule M itself, if you filed form

2555, check No Line 1a = earned income = Fill out by looking at the instructions

Worksheet Line 1 = Line 7 of 1040 = say $7000 Line 5a = foreign earned exclusion = $7000 in my example Line 8 = difference = $0 - this transfers to line 1a of Schedule M

So it looks like you have no making work pay credit.

However, this seems really strange. It looks like a bug in Schedule M. Normally all the rules in the tax code say to calculate your MAGI by adding back the FEIC. For example, the new medicare tax of 3.8% on investment income if your MAGI is above 200k/250k specifically says that MAGI is AGI plus the foreign earned income exclusion. The student loan interest deduction is phased out if your MAGI is between

60k and 75k, and to get the MAGI you add back the foreign earned income exclusion.

This led me to look at the law.

?SEC. 36A. MAKING WORK PAY CREDIT.

?(a) Allowance of Credit- In the case of an eligible individual, there shall be allowed as a credit against the tax imposed by this subtitle for the taxable year an amount equal to the lesser of--

?(1) 6.2 percent of earned income of the taxpayer, or

?(2) $500 ($1,0400 ($800 in the case of a joint return).

?(b) Limitation Based on Modified Adjusted Gross Income-

?(1) IN GENERAL- The amount allowable as a credit under subsection (a) (determined without regard to this paragraph and subsection (c)) for the taxable year shall be reduced (but not below zero) by 42 percent of so much of the taxpayer?s modified adjusted gross income as exceeds $70,000 ($145,000 ($150,000 in the case of a joint return).

?(2) MODIFIED ADJUSTED GROSS INCOME- For purposes of subparagraph (A), the term ?modified adjusted gross income? means the adjusted gross income of the taxpayer for the taxable year increased by any amount excluded from gross income under section 911, 931, or

933.

So it looks like if you make 7k you should get the full $400.

If you make $100,400 (and the FEIC is $91,400), then your AGI is $10,000. But your MAGI is still $100,400 and you don't qualify for the FEIC because it is phased out.

Reply to
removeps-groups

Not a bug. The new section 36A specifically says that earned income is what you got paid as long as it is included in gross income. Or in other words, it's what you got paid less the FEI exclusion. If you excluded all earned income... no credit. If not, you may be eligible for a credit as long as your MAGI is not too high. MAGI is AGI plus what you excluded under any section dealing with foreign income and possession income.

Reply to
Alan

OK, I see it. The American Recovery and Reinvestment Act of 2009 says: "2) EARNED INCOME- The term ?earned income? has the meaning given such term by section 32(c)(2), except ...".

And section 32(c)(2) is already existing in the IRC and it says

(2) Earned income (A) The term ?earned income? means? (i) wages, salaries, tips, and other employee compensation, but only if such amounts are includible in gross income for the taxable year, plus

Kind of unfair, because they add back the FEIC when it reduces your credit, deduction, but don't add it back when it would result in a higher credit. Oh well :(

Reply to
removeps-groups

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