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Old 06-20-2011, 08:00 AM
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Self employed income - can I use form 2555 to claim foreign earned income deduction?

Hello,

I have a US based LLC but I live abroad. My LLC is an online business selling to US customers, but I do all of my work from outside of the US. The money I earn goes from my US customers into my US bank account - it never comes into the country where I am living, therefore I do not pay tax on it here. I only pay taxes on the money I earn here or bring into the country (remittance basis). My question is whether I can use form 2555 to claim foreign earned income exclusion or foreign housing deduction? I was told that if I spend less than 30 days per year in the US, that I would be able to claim a deduction of $87,500 but I am unsure about how this works in practice. Any and all advice appreciated.

Many thanks in advance!



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Old 06-20-2011, 09:24 AM
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“The money I earn goes from my US customers into my US bank account - it never comes into the country where I am living, therefore I do not pay tax on it here.”-->No, you can’t; as you can see, the foreign earned income exclusion, the foreign housing exclusion, and the foreign housing deduction are based on your foreign earned income that you earn there in a foreign country in Europe as a US citizen or a US resident under either US Tax Law or US INS Rules. Your income that you earn in the US is subject to ONLY US taxes, both federal and state income taxes. I guess, you , as a nonresident of the foreign country, are NOT even subject to taxes to the country on your US source income.
“ I only pay taxes on the money I earn here or bring into the country (remittance basis).” My question is whether I can use form 2555 to claim foreign earned income exclusion or foreign housing deduction?”--->As long as you meet certain requirements, then you can claim your FEIE on Form 2555 on your earned income, i. e, salaries and wages, Commissions, professional fees , or etc. NOT unearned income ,i.e. Dividends, Capital Gains, Alimony, or etc. overseas that you earn in the foreign country. Or you can claim your foreign tax credit on the taxes that you paid to the foreign country on your US returns, both federal a d state tax returns, by using Form 1116.
“ I was told that if I spend less than 30 days per year in the US, that I would be able to claim a deduction of $87,500 but I am unsure about how this works in practice.’--->For 2011, the maximum FEIE is $91,500; in general, if you live and work outside of the United States, then you can exclude all or part of your foreign wages from US taxation. To qualify for the foreign earned income exclusion, you must : Work and reside outside the United States. Meet either the Bona Fide or Physical Presence tests.If you qualify,you will be eligible to exclude up to $91,500 annually in foreign wages. The amount of the foreign earned income exclusion changes each year. You can claim partial FEIC too as long as you pass physical presence residence test rule.
HOWEVER, you need to pay your selfemployment tax as long as the amount on Sch SE ine 4 is $400 or exceeds $400. You need to file both Sch C and Sch SE; also since you are filing as a sole proprietor or a self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return;You do not have to pay estimated tax for the current year if You had no tax liability for the prior year; you were a U.S. citizen or resident for the whole year;
your prior tax year covered a 12 month period.


Last edited by Wnhough : 06-20-2011 at 11:21 AM.


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