Enrolled Agent Exam: Recent Episodes
Hiroyuki Saito
When figuring compensation for a self-employed individual for purposes of determining the amount of an allowable contribution to a traditional IRA, which of the following statements is NOT true?
1.Self-employment income must be reduced by the deduction allowed for one-half of your self-employment taxes. 2.When you have both self-employment income, and salary and wages, your compensation includes both amounts. 3.If you have a net loss from self-employment, you must subtract the loss from any salary or wages received when figuring total compensation. 4.In order to include net earnings from a trade or business as compensation, your personal services must be a material income-producing factor.
explanation If you have a net loss from self-employment, do not subtract the loss from your salaries or wages when figuring your total compensation.
The foreign earned income exclusion and foreign housing exclusion provide some tax relief for US citizens living and working abroad. Which of the following is NOT a requirement to qualify for the foreign housing exclusion?
1.Foreign housing expenses may not be more than total foreign earned income for the tax year 2.The taxpayer must have qualified housing expenses in a foreign country 3.The taxpayer’s employer pays a housing stipend that is excluded from gross income 4.The taxpayer files Form 2555 to claim the foreign housing exclusion
answer The taxpayer’s employer pays a housing stipend that is excluded from gross income
explanation This correct answer in this question is the one that is a false statement.
To qualify, housing must be paid for by employer-provided funds; however, the amounts paid for housing, whether as wages or designated housing allowance, must be included in gross income.
The other statements are true. Foreign housing expenses may not be more than foreign earned income and must be paid for qualified housing expenses in a foreign country. Form 2555 is used to claim the foreign housing exclusion.
The foreign housing exclusion is subject to limitations. In general, taxpayers cannot consider housing expenses in excess of
- 30% of the maximum foreign earned income exclusion (may vary by location)
- 25% of the maximum foreign earned income exclusion (may vary by location)
- 70% of the maximum foreign earned income exclusion (may vary by location)
- 75% of the maximum foreign earned income exclusion (may vary by location)
answer 30% of the maximum foreign earned income exclusion (may vary by location)
explanation For purposes of determining the foreign housing exclusion or deduction, a taxpayer cannot consider housing expenses that exceed a certain limit. The limit on housing expenses is generally 30% of the maximum foreign earned income exclusion, but it may vary depending upon the location in which you incur housing expenses.
Q Jack was a resident of England. He may claim an exclusion from U.S. income tax on all his foreign source income under the following conditions, EXCEPT:
1.Tax home must be in a foreign country 2.Must have foreign earned income 3.He was a resident of England for a period of 6 months. 4.He is a US citizen or US resident alien
correct answer He was a resident of England for a period of 6 months.
explanation To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, a taxpayer must meet all three of the following requirements: Tax home must be in a foreign country Must have foreign earned income Must be either: A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.
Archie, a US citizen whose abode remains in Florida, takes a year-long sabbatical from his job as an aerospace engineer and spends 345 days living abroad. While away, he works various jobs to finance and enrich his stay. Identify the statement below about the foreign earned income exclusion that is correct?
1.Archie’s tax home is in Florida; Archie does not qualify for the foreign earned income exclusion
2.Archie must earn at least $107,600 before any foreign income can be excluded
3.If Archie is married, only the spouse with the higher foreign earned income may use the exclusion
4.Archie satisfies the bona fide residence test
Answer 1
Explanation If you maintain an abode in the US, you will be ineligible to have a tax home in a foreign country. An abode is one's home, habitation, residence, domicile, or place of dwelling. Archie’s tax home remains in Florida, so he doesn’t qualify for the exclusion. The tax home must be in a foreign country. A tax home is a place where a taxpayer permanently or indefinitely engages to work as an employee or self-employed individual. The tax home is not in a foreign country for any period in which the taxpayer’s abode is in the United States.
Taxpayers can exclude up to $107,600 (per spouse) in 2020.
Archie meets the physical presence test (at least 330 full days) not the bona fide residence test (entire tax year).