Making work pay credit and foreign earned income (Part 4)

I want to blog about something else today, but as its own note, I point out another strange [but maybe not! See Update #2] anomaly in the Making Work Pay Credit and this question of whether foreign earned income is, in fact, “earned income”. (That is, is it income of the kind that supports the credit being paid to you?)

The credit is limited by a “MAGI” figure. MAGI is modified adjusted gross income, and the numbers are $75,000 MAGI for a single person, and $150,000 for a couple (joint return).

Here is what the MAGI provision of the act says:

‘‘(1) IN GENERAL.—The amount allowable as a credit under
subsection (a) (determined without regard to this paragraph and subsection (c)) for the taxable year shall be reduced (but not below zero) by 2 percent of so much of the taxpayer’s modified adjusted gross income as exceeds $75,000 ($150,000 in the case of a joint return).

‘‘(2) MODIFIED ADJUSTED GROSS INCOME.—For purposes of subparagraph (A), the term ‘modified adjusted gross income’ means the adjusted gross income of the taxpayer for the taxable year increased by any amount excluded from gross income under section 911, 931, or 933.

Section 911 is the Foreign Earned Income Exclusion.

So the act (i.e. Congress) says to add back your foreign earned income to determine if you would qualify for the credit; but then, the Service is saying (with no support in the legislation that I can find) take the FEIE income back out to determine if you have earned income!

[Update: it’s on page 310 of that Adobe Acrobat link, by the way.]

[Update #2: This one might be in there for a fair purpose. If someone, single, had $115,000 of foreign earned income, they could exclude $91,400, and still have $23,600 that is not excludable in gross income. (Meaning, it’s going into AGI, whether or not they have other deductions to knock the tax liability away.)

In this instance, the MAGI is meant to calculate that the person really has the $115,000 earned income (more than the $75,000 cut-off for the full MWP credit). So this is why that’s in there. It’s just strange that there would be a part saying, in effect, “we add the money back if it enables us to deny you one way, and we take it out if we can deny you the other way.” Wouldn’t they simply have done what the EIC drafters did, and just exclude anyone taking the FEIE?

2 thoughts on “Making work pay credit and foreign earned income (Part 4)

  1. I would assume the reason they don’t blanket exclude anyone taking FEIE is based upon contract workers. If you live 330 days a year in a foreign country, but for 15 days every year, you earn income stateside, it’s possible to qualify for the credit in the manner that it’s worded. Unlikely, yes, but possible. If there were a simple FEIE exclusion, such individuals would not qualify.

    1. My operating theory is more basic than that: laziness or ineptitude.

      If you notice, the instruction that is knocking overseas earners out of Making Work Pay is the direction to go and fill out the form for the Child Tax Credit/Additional Child Tax Credit. There isn’t a special form to figure out overseas eligibility for the Making Work Pay credit.

      In 2008, under the same statutory language as Making Work Pay, Congress passed and President Bush signed a rebate program. You got either $300 or up to $600 back on whatever money you paid as tax in 2007. If you didn’t pay any tax, but had earned income, you got. Many English teachers in Japan, (of the few who file!) got rebate checks, even though their earned income was all excluded. Since it was first includible in gross income, the government counted it.

      From my research, it looks like someone decided that, no, no, that wasn’t right. And so they inserted this test from the Additional Child Tax Credit. The Obama people in IRS carried it over.

      I am having Turbotax generate a MWPC, apparently on the fact that I get to deduct my flight back home on December 20. I also know that people are getting MWPC based on the fact that they have deductible foreign overseas business expenses.

      The credit was not well thought-out and not well administered. I think that’s one of the reasons why, for 2011 tax year (the right-now tax year), it’s 2% off the social security rate instead.

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