Tax Law (Questions About Taxes)/Foreign income

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QUESTION: I'd like to thank you so much in advance for your response.
We live in New York. For the past year my daughter has been working as a teacher in Japan. Her income is about $2,500.00/mo. My question is, Taxes were deducted from her pay in Japan. Does she have to pay taxes in the US too? She has files taxes in the US only once so far. She still lives there and will be there for another couple of years,  Does she have to file in the US since she was not a resident in 2013. If yes,  Should she even mention her foreign incomes.
Thanks again

ANSWER: Mo,

Thanks for your question.  Pretty much "Yes" to your questions.

In the United States we have a worldwide tax system.  What this means is that American citizens are taxed on their worldwide income, regardless of source.

However, there is some tax relief.  The foreign earned income exclusion allows a taxpayer to exclude up to $97,600 in earned income from U. S. tax.  In order to qualify, the taxpayer must have been physically present in a foreign country for 330 days in a rolling 12 month period. If the taxpayer qualifies but was not in a foreign country for the entire year, the amount is prorated.

For example, a taxpayer arrives in a foreign country on July 1, 2013 and remains until May 1, 2015.  For 2013, they would qualify sometime in late May 2014 since that's when they meet the 330 day requirement.  For 2013. the maximum exclusion would be 184/365 x $97,600 representing the number of days in a foreign country for that year.  For 2014, they were in the country 365 days, so they would be entitled to the full amount.  For 2015, they would get 121/365 x the amount of the exclusion for that year.

The exclusion is calculated and reported on Form 2555.  Note that this applies to earned income only, it does not apply to interest, dividends, rental income, among others.

Hope this helps.

John Stancil, CPA

---------- FOLLOW-UP ----------

QUESTION: She's been in Japan for 355 days ,  if her Japanese income totaled $31,000.00 and she paid $2000.00 in Japanese taxes she will be paying some in the US  but lower than a person who makes over $97,600. At the same time she is working on finishing her Masters by taking on-line classes at a New Jersey Collge. Will this lower her taxes even more? Will they question how can she be filling foreign income but going to school in the US at the same time.
Thanks so much for your lightning fast responce.

Answer
Mo,

You don't give dates, but I imagine that she will not have any federal tax liability.  The proration I mentioned is gives the maximum exclusion.  Assuming that she was in Japan for 355 days in 2013, her maximum exclusion would be 333/365 x 97600 =94,672.  Since that's less than she earned, all her earned income would be not taxed.

I would add that she needs to file a NY return (assuming that was her residence prior to going to Japan) but the exclusion also applies in NY, so she would likely have no liability.

If need be she could take the lifetime learning credit, but it does not appear she needs to.  With online programs so common, the IRS would not question that.

Hope this helps.

John Stancil, CPA

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John Stancil, CPA

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I can answer questions on personal income taxes, partnerships, and some corporate income taxes. I can deal with some state tax questions. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I am Professor Emeritus at Florida Southern College. Sales taxes and property taxes are state and local issues so I am not likely be be able to give you an in depth answer on those types of taxes. I have maintained a CPA practice, specializing in tax, for over 35 years. I am a member of the National Association of Tax Professionals, The Florida Insititute of CPA's, The NCPE Fellowship. In addition I am a Certified Mentor for SCORE. Visit my website at www.mybaldcpa.com. I also offer seminars and consultations to churches and clergy on their tax issues at www.churchtaxsolutions.com Also visit my blog, www.thetaxdocspot.com. I am listed on Tax Connections at https://www.taxconnections.com/profile/John-Stancil/12258973 Prepare and file your own taxes at www.1040stancilcpa.com

Experience

I hold a doctorate in Accounting, and am a CPA. My certifications of CIA, CFM, and CMA are inactive. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I have operated a CPA firm for over 37 years and have taught accounting and tax at the college level for over 35 years.

Organizations
FICPA, NATP, NCPE Fellowship, Lakeland Business Leaders

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The CPA Journal, Florida CPA Today, Green Consumer, Green Business, Global Sustainability as a Business Imperative, Palmetto Review, NATP TaxPro Quarterly, Mustang Journal of Finance and Accounting.

Education/Credentials
DBA University of Memphis MBA University of Georgia BS in Accounting Mars Hill University

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