A.G. Kalman wrote:
- quote -

Thanks a lot for these detailed responses to my question.
Very helpful.

Jay.

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Jay wrote:

- quote -

I am am making the following assumptions: Your use of the
phrase "in the U.S." in paragraph one means you were paid by
a U.S. entity for work performed in a foreign country (see
your second paragraph). You are US citizen or US resident
alien. Capital is not an income producing factor in your
business.

You report all your income on your US tax return because the
law requires you to report all your income regardless of its
source. You "appear" to qualify for the $82,400 FEIE.
However, you may not be able to deduct the whole $82,400 as
you are required to subtract any deduction that was used to
determine your AGI that is allocable to the foreign earned
income you are excluding. E.g., if you are deducting moving
expenses you incurred moving overseas, you would have to
deduct those expenses from your FEIE. See the instructions
to Form 2555.

Once you have the final FEIE you determine your AGI and
taxable income. For 2006, you compute your taxes based on
your income without the exclusion. This is a change from
prior years and was included in Public Law 109-222. There
will be a new worksheet in the 1040 instruction booklet. If
you want to see the draft version of the worksheet, it is
at: http://www.irs.gov/pub/irs-dft/i1040gi--dft.pdf

The foreign tax credit will be computed on the foreign
income taxed by foreign countries after you exclude the
$82,400. That would be $67,600. You may want to look at the
tax treaty (if one exists) between the US and your country
of residence as treaties can trump the FEIE.

Based on the above, it is quite possible that you will be
paying US tax for 2006.

As to your US state of residence..... Each state sets its
own laws. Many of them totally disregard the FEIE and the
FTC. You would have to check with your state of residence to
see how your foreign income is taxed. It is quite possible
that you will owe state income taxes on your taxable income
as defined by the state.

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- quote -

ASSUMING that you meet the requirements of the foreign
earned income exclusion, then you are correct that you will
be able to exclude up to roughly 82K of income (as long as
you file and elect the exclusion). The amount of U.S.
federal income tax on the remainder will depend on the
average foreign tax rate and the average U.S. tax rate. It
sounds as though a portion of the compensation will not be
taxed in the foreign country. This means that your average
foreign tax rate will be low. As a result, you will likely
owe U.S. federal income tax on these earnings. You cannot
specifically identify the earnings to be excluded and the
earnings to claim foreign tax credits.

Also, you may still owe state income taxes if you continue
to be considered a resident of a particular state. States
do not generally allow foreign tax credits to be claimed to
reduce state income taxes.

Andrew Mitchel
Essex, Connecticut
www.andrewmitchel.com

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My total income in 2006 will be 150K. Of this, I receive 75K
in the U.S. as consulting income and the balance 75K in the
foreign country where I lived for the entire year 2006.

Now, in the foreign country, I will pay 25% taxes on my 75K
income. In the U.S., I declare my entire 150K income as
foreign income (because the money I received in the US was
still for work done in a foreign country). Then, I can claim
80K exemption (or whatever the new amount is) and for the
balance 75K, foreign tax credit and essentially do not pay
any federal/state taxes in the U.S.

Is this correct?

Thanks.

<< ================================================== ===== > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >