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  1. #11

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    Quote Originally Posted by WordIsBond View Post
    Thanks for the challenge. I can't back that up, so it appears I may have been fed duff information on it. Helps to reiterate that I am NOT an expert on this stuff.

    What I said about it being general category income for the Foreign Tax Credit IS pretty clear from the instructions for Form 1116. But I can't find anything about it in relation to the FEIE. If you want to use FEIE to wipe out US tax liability, you pretty much have to either go umbrella or go with a disregarded entity. In almost every case, I think the disregarded entity is best.

    As for the amount of the FEIE, OP said 300 / day. Assuming 230 days a years, that's 69K, which given current exchange rates is well within the FEIE limit. The best advice I could give, actually, is to make more money, rendering the FEIE not a good option.

    Again, depending on other factors, the Foreign Tax Credit may be far superior. It also has the advantage that you always pay more UK tax than US tax, so you get a carryforward of your excess tax credit. That can be carried forward for ten years. If you have a year in the future where your UK income is relatively low, having that carryforward could end up being quite beneficial.

    The FEIE also makes calculating the Alternative Minimum Tax more complicated. At that level of income, I don't think AMT is an issue, however.
    Yeah, you're right, the FEIE should be adequate for the OP. Also, I'm not saying you're wrong about dividend income from a CFC being allowed within the FEIE, but there would have to be a special allowance for that because, in general, dividend and other unearned income is not allowed, so I was just interested if you had any concrete info. on that.

  2. #12

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    Quote Originally Posted by jamesbrown View Post
    Yeah, you're right, the FEIE should be adequate for the OP. Also, I'm not saying you're wrong about dividend income from a CFC being allowed within the FEIE, but there would have to be a special allowance for that because, in general, dividend and other unearned income is not allowed, so I was just interested if you had any concrete info. on that.
    Well, I may not be wrong about it, but after you challenged it, I started digging and couldn't find anything in IRS guidance. It might be in the Treasury regs somewhere, with the IRS not including it in its guidance -- pretty obscure stuff, and tax authorities aren't always the best. I'll ask my friend to push his US accountant on that point and report back if I get anything either way. I'm not likely to want to go digging through the regulations myself.

    For now, certainly, no one should rely on what I said on that question.

  3. #13

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    Thanks all.

  4. #14

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    Do we know the person in question has the correct leave to be able to contract or are we just assuming that?

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    Quote Originally Posted by stek View Post
    Do we know the person in question has the correct leave to be able to contract or are we just assuming that?
    She was born here but moved to the US as a kid.

  6. #16

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    Quote Originally Posted by Invisiblehand View Post
    She was born here but moved to the US as a kid.
    To a British or settled person?

  7. #17

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    Quote Originally Posted by WordIsBond View Post
    Well, I may not be wrong about it, but after you challenged it, I started digging and couldn't find anything in IRS guidance. It might be in the Treasury regs somewhere, with the IRS not including it in its guidance -- pretty obscure stuff, and tax authorities aren't always the best. I'll ask my friend to push his US accountant on that point and report back if I get anything either way. I'm not likely to want to go digging through the regulations myself.

    For now, certainly, no one should rely on what I said on that question.
    OK, this is interesting, I got an answer back.

    The argument is that since the income has to be reported as Subpart F income, and therefore has to be reported on 1040 line 21, the principle from 26 1.911-3 b(1) should apply. Link. Relevant text:

    Earned income does not include any portion of an amount paid by a corporation which represents a distribution of earnings and profits rather than a reasonable allowance as compensation for personal services actually rendered to the corporation.
    The substance of the argument is that income from a corporation is considered foreign earned income only to the extent that it is a "reasonable allowance as compensation for personal services actually rendered to the corporation." Fair enough, that's pretty clear. You can't pay yourself a massive salary when you've done nothing and then claim it was foreign earned income. You have to recategorize some of it, for purposes of the FEIE, as dividend or passive income of some kind.

    The argument is that then it should also work the other way. If your salary / dividend income split doesn't reflect a "reasonable allowance as compensation for personal services actually rendered to the corporation," because your salary is too low, you should recategorize some of that for purposes of the exclusion to salary -- basically, it's IR35 in reverse.

    There's a logic to it. I can't say the IRS would fight it, or if they did, that you'd lose in the American legal system. But it's a lot simpler to just file as a disregarded entity and not have to do Form 5471. And it's also probably simpler, cleaner, and safer if for some reason 5471 makes more sense for you, to claim the Foreign Tax Credit.

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