IRS Form 1040 Schedule M: write them a note!

I get a lot of hits on this one, especially from overseas expats around the world wondering where their Making Work Pay Credit (MWPC) went. Let me try to help again.

In the best instance, please go back and read what I’ve written about it. But let me recap with a short explanation:

Excluding income from gross income is not the same as excluding income from adjusted gross income. Whoever drafted the Schedule M didn’t understand the distinction. They equated foreign earned income with the kinds of income like your employer-paid health insurance (which is not gross income as it’s defined and doesn’t appear anywhere on the 1040). There are things like combat pay (defined as “not gross income”) that you can choose to include in gross income for purposes of the Earned Income Credit. I think that has thrown them off, too.

Your foreign earned income goes on Line 7. It is part of gross income.

The trouble with the Schedule M drafter’s interpretation of foreign earned income is that they’ve suggested you don’t have income if you just have foreign earned income. It’s opened up a can of worms about filing overseas. If foreign earned income is not “includible in gross income”, then why ask anyone for a return at all? It should be treated like employer-paid health insurance: not something that even goes on the return.

Well, that’s nonsense, but no one at IRS has caught on to the problem that their MWPC definition creates.

So, like I say, you are not my client, good reader, and I can’t give you specific tax advise over the internet. But: it’s not unreasonable, that if you are overseas and want Making Work Pay Credit, write the IRS a note saying that you in fact had the foreign earned income that you are reporting, and ask for the credit based on this income.

There are other pitfalls which are legitimate:

You have to add back foreign earned income to see if you are eligible. The phase out levels are $75,000 (single) and $150,000 (couple). So if you are single and had $110,000 foreign earned income, you’re out of the range anyway.

If you have been stateside and got certain other credits during 2009, you would be cut off from it, at least in part. I think this is the case where a retiree has gotten both a social security check and worked a little last year. They will take back all or part of the $250 special check the Treasury sent last June.

If you are an inmate in a jail and have reportable earned income, you still can’t get the credit.

You must have a social security number to get the credit.

Please read the IRS website for the other details.

Remember, the tax system is based on declaration, not assessment. People confuse the language about a “voluntary” system to mean that paying taxes is their choice. You especially get that one from time-to-time overseas. But “voluntary” really means is that you have the right to declare your income and tax, not that the IRS imposes it on you. (If you screw up the declaration, then, yes, the IRS will impose tax, interest and penalties on you.)

I claimed the credit, because I don’t want to lose the right to the credit. The IRS under the Bush Administration was sending the 2008 stimulus money which was based on the same definition of earned income and foreign earned income to American taxpayers overseas. Nothing changed about the definition.

Schedule M is in error. We are the beta testers this year.

[Update: if you’re nervous about that, nothing says you can’t pay up the tax money without the credit, and still ask the Service to give you the credit. They can only say “no”.]