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Posted by Arthur Kamlet on July 8, 2008, 1:45 am
Please log in for more thread options >On Jul 6, 9:46 am, kam...@panix.com (Arthur Kamlet) wrote:
>
>> Under the Foreign Earned Income Exclusion rules, the foreign earned
>> income is the lowest taxed income, so excluding it cuts out taxes
>> at the low tax rates, and other income, such as conversion income
>> from a 401k to an IRA, is taxed at the higher rates.
>
>Does that mean if you have 100k of foreign earned income and an 85k
>foreign earned income credit, then the remaining 15k is taxed at the
>higher rate of 28% (for single filers: 10% rate at 0 to 8,025; 15%
>rate at 8,025 to 32,550; 28% rate at 28% rate is from 78,850 to
>164,550)? Since you would just enter the 85k as negative other
>income, it seems it that the net income would be 15k and would be
>taxed at 10% and 15%.
>
>I did some research and saw that there is a tax worksheet "Foreign
>Earned Income Tax Worksheet—Line 44". It looks like it computes tax
>on 100k, tax on 85k, and subtracts the results. The result is
>probably 0.28*15k=4.2k.
>
>
>And what are the tax rates for the foreign tax credit?
>
>Suppose the foreign country currency is F and that 1 F = 1 USD.
>Suppose the foreign country has brackets of 0% (0 to 5,000F), 10%
>(5,000F to 10,000F), 20% (10,000F to 15,000F), 60% (15,000F to
>infinity).
>If your income was 100F, then the foreign country withheld 5000*0 +
>5000*0.1 + 5000*0.2 + 85000*0.6 = 52,500F.
>
>Suppose the foreign exemption is 85k, then only 15k of income is
>taxable. The taxon it looks to be 28%, or 4.2k, as shown above.
>
>What is the foreign tax credit? Is should be the smaller of the US
>tax on your foreign income or the actual foreign tax paid. But which
>15,000F is it? The lowest 15,000F has a tax of 5000*0 + 5000*0.1 +
>5000*0.2 = 1500F. But the highest 15,000F of income had a tax of
>0.6*15,000 = 9,000F. I would imagine that as the US taxes the highest
>15k of earnings, then the foreign tax credit should be on 9,000F. So
>the foreign tax credit would I think be min(0.28*15k, 0.6*15k)=4.2k.
Without doing the calculations, the way the foreign tax credit calculations
work is to compare the foreign tax rate on the foreign income vs the
US tax rate on that same income, and limit the credit to the lower of the two.
And of course, no foreign tax credit is allowed on foreign earned
income excluded on form 2555. You will have to allocate foreign tax
paid to the amount of foreign earned income excluded and not excluded,
and calculate foreign source income using the nonexcluded portion.
--
ArtKamlet at a o l dot c o m Columbus OH K2PZH
--
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