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:
‘‘(b) LIMITATION BASED ON MODIFIED ADJUSTED GROSS
‘‘(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?