GringoPost | Ecuador: Taxable income and the Foreign Earned Income Exclusion

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Taxable income and the Foreign Earned Income Exclusion

For those expats that run a business in Ecuador, as US citizens we are required to report our world-wide income, no matter the source or where earned (Title 26 U.S.C. Section 63).

The good news is that I.R.C. Section 911 provides you the opportunity to exclude up to $102,100 of "earned income" from federal tax. For a "service" business, the exclusion is straight-forward, but for a "product" business, the exclusion requires a more convoluted calculation. In either case, you will be subject to the SE Tax (Self-Employment) which will also require some complicated calculations. Whether the business is "service" or "product" related, you still need to determine if a "net income" exists. Expenses used to arrive at that amount are also subject to a calculation based on the excluded amount vs the exclusion limit (Treasury Regulation Section 1.911-6(a). Also, if you have a "net income" which is included on your 1040, any federal tax is calculated without regard to the "excluded" amount.

Of great import is your "intention" regarding the operation of your business as a "for profit" vs a "hobby" business which is a subject that I'll cover in another post. To even qualify for the FEIE, certain tests need to be met and remember this is a voluntary choice, not an automatic one. New development: T.C. Memo 2017-180 Linde, Petitioners v Commissioner Internal Revenue, Respondent.

You might wonder why I'm including government tax law sections. For those that are "do-it-yourselves" I'm providing you with references that you can utilize in preparing your own taxes.

With my next post, I'm going to cover the latest developments regarding the IRS and crypto-currencies.

January 29, 2018 official start of tax season,

John Papile: ojohnnio@aol.com