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Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 355
Experience:  Former IRS Revenue Agent
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A singer/composer earned $35,000 as foreign income in 20

Customer Question

A singer/composer earned $35,000 as foreign income in 20 countries presentation. He paid $4,056 U.S. Dollars as foreign taxes withheld. I understand that the 2015 exclusion for foreign income is $100,800 per qualifying person. This singer is U.S. Citizen and leaves most of the time in USA. How do I present this income in his personal taxes?
Submitted: 2 months ago.
Category: Tax
Expert:  Dr. Fiona Chen replied 2 months ago.

Dear Customer,

The taxpayer has foreign earned income but he may not be considered as qualified for exclusion. He has to travel because his job.

For most taxpayers who qualify for the exclusion, they has physical presence and residence tests. This taxpayer can be considered as commuting from the U.S. and internationally for his performances. His tax home may still be in the United States. It could be similar to a sales person traveling around the world to do sales to earn commission when his tax home is still in the U.S.

It is suggested that:

1) Analyze his travel itinerary and do a comprehensive analysis in terms of days in each country. It seems that he has never established a foreign residence. Analyze his reason in returning to the U.S. physically. It is likely that he came back to the U.S. for business reasons. Analyze whether he keeps an U.S. home residence. He could be just traveling in certain countries for vacation purpose. That will cut down his presence days significantly.

2) On his earning of 35,000. If it is gross, it does not seems to be sufficient for traveling to 20 countries. With all the costs included, his net could be negative with a loss. He may also qualify for Form 1040, line 24, performance artist expense first page deduction.

3) He could be with self-employment income/expenses; then, he may owe self employment taxes. That is good for him because he is earning U.S. social security credits.

4) Foreign tax credit can be deducted as page 2 of form 1040, line 48, foreign tax credit. In his case, you may want to consider to deduct as his performance income. Make sure he has proof.

However, in general, there are several issues and allow me to explain why this direction is suggested.

First, he has too little income to support that much professional performance traveling. You need to ask him and make sure that all income is reported. If his family is supporting him with loan or gifts, etc. We, the accountant, need to exercise basic responsibility to verify the return is reasonable.

Second, try our best not to use the foreign residence income and housing exclusion in this case. His position may not be able to be defended. His income is not high. We don't have to use the exclusion. He could be negative already.

Third, for the negative, loss, he can generate some valuable Net Operating Loss to carry forward for the future. Therefore, we need to verify with him and "grill" him to get all his expenses to make this net operating loss as large as possible. Once he is famous in the future and earn much income, he can use the loss.

Fourth, even if the IRS does not audit, with a person claiming to perform over 20 countries, with only 35,000 income, and qualifies for 100,800 deduction, this Form 1040 is very close to a bogus and false tax return.

On the surface, with the information, it looks like a person is taking his/her time to tour the world and pick up some loose income here and there. That is not foreign income exclusion. Make sure that he has proof for income and performance diary and schedule.

For a professional performer to book contracts in 20 countries, that is a huge cost and operation.

Please feel free to follow up.

Regards,

Fiona

Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP

Customer: replied 2 months ago.
What about the withhold taxes that he paid on those funds? Can he add it to the federal taxes withheld in U.S.A.?
Expert:  Dr. Fiona Chen replied 2 months ago.

Dear Customer,

As described above, "4) Foreign tax credit can be deducted as page 2 of form 1040, line 48, foreign tax credit. In his case, you may want to consider to deduct as his performance income. Make sure he has proof."

As you described, "He paid $4,056 U.S. Dollars as foreign taxes withheld." The withholding is paid to foreign countries and not to the U.S. Government. Therefore, it is not federal income tax withheld.

It is foreign tax paid. To get credit for foreign tax paid, one can claim the taxes paid on Schedule A, line 8, or on form 1040, Line 48. Your client does not have sufficient deduction to take advantage of line item deduction. Therefore, his other choice is Form 1040, line 48. He may or may not be able to obtain credit this year. If not, he will need to carry forward to the future. In his case, he may want to deduct as part of his expenses, depending which way you see is more beneficial. Taxpayer's testimony can be considered as evidence. However, credits are one to one dollar deduction of tax. If he does not have sufficient evidence to prove he paid foreign tax (this needs to be income tax and not other types of tax), it is safer to report these taxes paid as expenses and not foreign tax credit.

Regards,

Fiona

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