Use earned income in a sentence

“ I had a lot of earned income and it made me and my family very happy, because I had put a lot of work into my company. ”

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“ You children need to thank your father every day, it is because of how hard he is always working and all the earned income he has that you have nice things. ”

“ While most Americans report the vast majority of their compensation in their taxes as earned income derived from wages or salary, some wealthy Americans report more un earned income (e. g. stocks, bonds, etc.) in their tax filings. ”

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Requirements to Claim the Foreign Earned Income Exclusion

The requirements to claim the foreign earned income exclusion is that the taxpayer's tax home is in the foreign country and the taxpayer meets either the 1-year foreign residence test or the 330-day foreign physical presence test. If the taxpayer does not satisfy either time test to claim the foreign earned income exclusion or the housing exclusion or deduction by the due date of the return, but expects to do so, then the taxpayer can either file for an extension of time on Form 2350, Application for Extension of Time to File US Income Tax Return for US Citizens and Resident Aliens Abroad Who Expect to Qualify for Special Tax Treatment until she qualifies under the time test or she can file a return on the due date, reporting the income and paying the tax, then file for a refund when the time test is satisfied.

An additional qualification is that the taxpayer be either a US citizen or a resident entitled to tax treaty benefits who meets either the foreign residence or physical presence test in a foreign country. Tax treaties with foreign countries are generally designed to prevent double taxation. More information can be found in IRS Publications 54, Tax Guide for US Citizens and Resident Aliens Abroad and 901, US Tax Treaties.

If the taxpayer qualifies for the foreign residence or physical presence test for only part of the tax year, then the exclusion limit is reduced by the percentage equal to the qualifying time divided by the number of days in the year. So if a taxpayer satisfies the foreign or physical presence test for 293 days in 2016, then the maximum exclusion is $80,916 (= $100,800 × 293/365). If married, the spouses can each claim the foreign earned income exclusion and the foreign housing exclusion if both meet the foreign residence or physical presence test, even if their permanent home is in a community property state. However, they must each file a separate Form 2555, even if they file jointly.

The following are not considered foreign countries:

Puerto Rico, Virgin Islands, Guam, Commonwealth of the Northern Mariana Islands, American Samoa, Johnston Island, or Antarctica.

Furthermore, income earned in international airspace or international waters is not considered income earned in a foreign country. That the foreign earned income exclusion does not apply to Antarctica or to international areas makes sense since there are no taxing authorities in those areas.

If the tax home is within the United States, then the taxpayer may claim the foreign tax credit and deduct living expenses while away from home if the assignment was temporary and was expected to last and actually did last for 1 year or less. A taxpayer with the tax home in the United States may not claim the foreign income exclusion but only the foreign tax credit and deduct living expenses while away from home.

The foreign earned income exclusion or the housing exclusion or deduction cannot be claimed if the taxpayer lives in a country, listed in Form 2555, that is subject to United States government imposed travel restrictions.

If the failure from satisfying the foreign residence or physical presence test was because of a war or civil unrest, then the exclusion can be claimed for the period in which the taxpayer was a resident or physically present. Foreign locations and the time periods to qualify for the waiver are listed in the Form 2555 instructions.

Foreign Residence Test

The foreign residence test is satisfied by a US citizen who is a bona fide resident of a foreign country for at least 1 full tax year. This also applies to a US resident alien who is a citizen of a country that has an income tax treaty with the US and meets the full-year foreign residence test. Business or vacation trips outside of the country, including to the United States, does not disqualify the taxpayer from satisfying the foreign residence test.

A bona fide resident of a foreign country is one who takes actions that would indicate an actual relocation to the country, including:

bringing the family; buying a house or renting an apartment rather than going to a hotel room; having a permanent foreign address; joining clubs there; opening charge accounts and stores in the foreign country; and participating in foreign community activities.

However, a taxpayer who does not qualify as a bona fide resident can still qualify under the physical presence test.

Physical Presence Test

To satisfy the physical presence test, the taxpayer must be present on foreign soil 330 days during a 12 consecutive month period. However, the days do not necessarily have to be consecutive. A full day is considered from midnight to midnight. The 330 day period can include time spent traveling between foreign countries while on vacation, since there is no requirement that the days were spent working; even working for the US government also counts. If the 330 day physical presence test is satisfied, then the taxpayer can claim an exclusion equal to the maximum foreign income exclusion multiplied by the number of days in the tax year when the foreign presence test was satisfied divided by the number of days in the tax year:

A person's earned income for a given year can be found on her W-2 forms.

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Earned income is income earned from work. If someone works at a lemonade stand and receives money for it, for example, this would be earned income. This is in contrast with unearned income. To borrow the lemonade stand example again, if someone invested in a lemonade stand and received dividends, these dividends would be considered unearned income because they were not the result of work. Earned and unearned income are treated differently for tax purposes.

A number of different types of compensation can fall under earned income. All income from wages, salaries, and tips is part of someone's earned income. Likewise, disability benefits are sometimes treated as income for tax purposes as long as someone is below retirement age. Profits from self employment are earned income, and in some regions of the world any benefits paid out by a union to striking workers are also taxed as income.

By contrast, things like rents received, interest, capital gains. and dividends are unearned income. While these monies are indisputably income, the recipient did not work for them. Usually tax forms provide clear descriptions for each field so that people can be assured that they are documenting their income correctly. If someone is confused about where on a tax form a given piece of information about income needs to be disclosed, an accountant or tax attorney can be consulted for more information.

Tax benefits like the Earned Income Tax Credit (EITC) in the United States are based on earned income, and earned income is also usually taxed at the base income tax rate. Taxpayers are also entitled to take deductions when filing their taxes to reflect expenses incurred over the course of the year. Not every expense is tax deductible and there can be penalties for claiming expenses which do not legally count as deductions.

There are several ways in which people may document their earned income. Employers are usually required to send out annual disclosures documenting how much they paid to their employees. Employees can also keep paystubs and use them as records of earned income. It is advisable to keep track of pay over the course of the year and to check one's own figures against those provided in an employer's income disclosure statement for the purpose of confirming that it is correct. If the figures do not agree the statement should be amended to reflect the right figures and refiled.

Foreign Earned Income

Foreign earned income is considered a compensation for personal services that were performed in the foreign country and the taxpayer meets either the foreign residence test or the physical presence test. Earned income does not include pensions or annuities, or any type of investment income, or other types of income that was not earned by providing services, such as gambling and alimony.

Foreign earned income does not include any earnings from countries subject to US government travel restrictions, or income earned in geographical areas outside of the jurisdiction of any particular country, such as Antarctica, international waters, or international airspace.

If the source of business income is only for personal services, then 100% of that income is considered earned income. However, if capital is also an income-producing factor, then the value of the personal services provided is considered earned income but the amount cannot exceed 30% of the taxpayer's share of the net profit. In calculating the 30% share, the net profit must be reduced by the 50% self-employment tax deduction. Profits earned by a passive partner are not considered earned income. If the business suffers losses, a reasonable allowance for personal services is considered earned income.

If a US partnership has a foreign branch, then the partnership agreement determines the tax status of the allocation of foreign earnings to partners living abroad as to whether it is considered foreign earned income. However, an allocation based primarily on tax savings may not be recognized by the IRS.

Earnings from copyrights are considered earned income, but not patents nor the leasing of oil and mineral lands. Rental income is generally not considered earned income, unless the taxpayer performs personal services, such as managing the rental.

If the taxpayer moves back to the United States, but remains with the same employer, then moving expenses are considered US sourced income, and, thus, cannot be excluded. However, if the taxpayer changes employers after returning to the US, but the old employer pays for the moving expenses, then that is considered foreign earned income for services rendered in the foreign country.

Foreign earned income that was earned in a prior tax year but was paid later does not qualify for the foreign income exclusion. However, it may be tax-free if the amount was less than the foreign income exclusion that was available in the previous year. Income that was earned in the previous year but paid in the next year can be excluded if the payment was within a normal payroll period of 16 days or less.

If foreign taxes are paid on foreign earned income that is tax-free within the United States, then no credit or deduction can be claimed, since there is no US tax liability for the income.

Foreign Earned Income Exclusion

2017-01-02 The United States (US ) government taxes the income of its citizens, resident aliens, and domestic corporations regardless of where the income is earned. Likewise, nonresident aliens and foreign corporations are also taxed on income that is effectively connected to a trade or business conducted within the US. Most other countries do likewise. Hence, a US taxpayer who earns money in a foreign country incurs a tax liability to both the foreign country and to the United States. Since this double taxation can be quite onerous, the US tax code allows a taxpayer to claim the foreign earned income exclusion, a foreign tax credit, or deductions for foreign expenses.

Adjusted annually for inflation. The maximum base foreign housing amount = 16% of Annual Exclusion Limit on housing expenses that exceed base housing amount = 30% of Annual Exclusion If qualifying days < 365, then the above limits = Number of Qualifying Days / 365 Qualifying days are those that meet the physical presence or foreign residence test Source: Foreign Earned Income Exclusion

To claim the exclusion, the taxpayer must have a tax home in the foreign country and must satisfy either the foreign residence or physical presence test. US government employees may not claim any exclusion for government pay earned abroad.

If foreign income is not excluded, then the taxpayer can either deduct the foreign tax paid or claim the foreign tax credit. Generally, the tax credit will yield greater tax savings. However, if the foreign income tax rate is high and the amount of foreign income to US income is small, then a deduction may be more advantageous. In any given tax year, the taxpayer must choose either to use the tax credit or take the deduction — it cannot do both in a single tax year. However, choosing to claim deductions will allow the taxpayer to carry back any unused credit from a future tax year.

The applicable tax year for foreign earned income is the year in which the income is earned, not when it is received. If gross income exceeds the filing threshold for the filing status of the taxpayer, a US income tax return must be filed even if the taxpayer owes no taxes on the income.

The exclusion is not automatic, but must be claimed on Form 2555, Foreign Earned Income. which is attached to Form 1040. The election for the housing cost exclusion is also claimed on Form 2555. Form 2555-EZ, Foreign Earned Income Exclusion can be used if the taxpayer has no self-employment income or does not claim the foreign housing exclusion or deduction, or any business or moving expenses, and if income is less than the foreign earned income exclusion.

An employer must withhold taxes from payments to employees, but an employee can file Form 673, Statement for Claiming Exemption from Withholding on Foreign Earned Income Eligible for the Exclusion(s) Provided by Section 911 with the US employer to claim the exemption from withholding on wages because of the expected foreign earned income exclusion or foreign housing exclusion. However, the taxpayer must certify, under penalty of perjury, that the taxpayer has a reasonable basis for believing that he will qualify under the foreign residence or physical presence test. Estimated foreign housing costs must also be certified.

If the foreign income exclusion is claimed, then the taxpayer may not claim any business deductions that are allocable to the excluded income — foreign taxes paid on the excluded income cannot be claimed either as a credit or a deduction, and neither traditional nor Roth IRA contributions can be based on the excluded income.

Any taxable income that is not subject to the earned income and housing exclusions will be taxed as though no exclusions have been claimed. Regular tax liability must be calculated on the Foreign Earned Income Tax Worksheet in the Form 1040 instructions and the AMT liability is calculated on the Foreign Earned Income Tax Worksheet in the Form 6251 instructions.

Generally, to maximize tax savings, the taxpayer will have to calculate taxes using the foreign exclusion and without the foreign exclusion but using the foreign tax credit and allowable deductions.

If the taxpayer chooses the exclusion, then that election remains in effect until the taxpayer specifically revokes it, after which the taxpayer cannot choose the exclusion again for 5 years without IRS consent. Foreign earned income exclusion and the housing income exclusion must be revoked separately by attaching a statement to the tax return. However, the IRS will generally allow a change in calculating foreign income if there's been a substantial change in the tax law of the foreign country, the taxpayer moves to a different country with different tax rates, or the taxpayer changes employers.

If the taxpayer claims the foreign tax credit or the housing credit, then the IRS will consider that to be a revocation of the election to claim the foreign earned income exclusion.