I am happy I finally got someone’s attention at TurboTax.
Hopefully, you’ve looked at what I’ve written about Schedule M over throughout the year, and know someone at the IRS who can shed light on why the schedule seems to ignore or change what Congress actually enacted. Plus the strange math a filer goes through when the[y] have to addback their Form 2555, Line 44 number (Schedule C expenses), which in turn creates a credit, even though the Service will later say, no, you don’t get a credit.
One of my readers reports to me that he got dinged for interest and penalties on that, even though he religiously followed every step in the booklet. I don’t give out internet advice, but what I have been telling local expats who ask me is that they should ask the Service to calculate the Schedule M. Simply because, if you follow the rules, you get dinged.
A lot of my weekend discussion, which no doubt bored 95% of my Japan-side readership, is about the meaning of “includible in gross income”. I have always taken it to mean things that Congress didn’t specifically exclude, like the Part III exclusions, and of course items like deferred income, of Section 401, et seq. Foreign earned income has always been includible in gross income. I think any other definition is the camel’s nose under the tent for expats who don’t want to file, and in fact why the filing requirements in Section 6012 specifically say that your gross income is calculated without regard to the exclusion provided in Section 911.
I may be totally wrong on this, but if I am, then the Service was also in 2008, when the last stimulus credit (found in Section 6428) was sent out as checks from the Treasury, based on 2007 returns. I know several people in Japan who got that one, and they report that they only had English teacher wages and the Form 2555 (Foreign Earned Income Exclusion or FEIE). No stateside income, just the plain vanilla FEIE filing.
If you will note, the definition of earned income in Section 6428 is the same as that in Section 36A (Making Work Pay Credit).
One more strange point, that I haven’t blogged enough about maybe, is the how the definition for the self-employment income is being applied. As I mentioned to Devin of Class5tax.com:
The term “earned income” has the meaning given such term by section 32 (c)(2), except that such term shall not include net earnings from self-employment which are not taken into account in computing taxable income. For purposes of the preceding sentence, any amount excluded from gross income by reason of section 112 shall be treated as earned income which is taken into account in computing taxable income for the taxable year.”
[The bolded part is what commenters generally understand refers to the parsonage allowance of Section 107.]
If the above phrase does apply to FEIE, why did they say:
“which are not taken into account in computing taxable income”?
That seems awkward, since Schedule C income is indeed taken into account in computing taxable income, even if you use a Form 2555 filing to exclude it. Wouldn’t they have said:
“shall not include net earnings from self-employment which have been excluded from gross income”?
In this way, you get both the FEIE and the parsonage allowance. The other way seems to just get the parsonage allowance.
So here is yet one more point that makes Schedule M really strange.
My feeling is that an American taxpayer filing from this side of the Pacific (or anywhere abroad), should have gotten the (max) $300 in 2008, and the $400 in 2009 and also for 2010 in next year’s filing. (Yes, provided they weren’t MAGIed and have an social security number.) But obviously someone at the Service is now saying “no” to the $400 ones, the Making Work Pay Credit.
It’s disconcerting, because I’ve encouraged Americans in Japan to file. (Non filing is the worst thing.) But I, in good conscience, can’t advise filling out the Schedule M, even though they should claim the credit.
Sorry to my regular readers to go off on this tangent again. That maximum $400 check is serious money for a number of people doing low-wage work in Japan.
[Update: In breaking news, it’s obvious that Congress also knows how to write a tax rule when it means to provide a cut a social security or FICA tax, rather than a credit representing an amount based of FICA. The tax bill that just passed the Senate, the early proposal of which is here, provides in Section 601 for a 2% reduction in FICA, to the benefit of the employee or self-employed individual paying SE tax.
In this one, it’s obvious that foreign earned income is not a factor. The Senate is clearly (as it would be for tax law!) saying that the OASDI rate goes from 12.40% down to 10.40%, with the difference of 2% being a reduction in the employee portion of the tax. Only if the American taxpayer abroad is filing SE tax would he/she see the benefit. ]
[Update #2: A reader points out to me that the worksheet which is disallowing the Foreign Earned Income Exclusion is the same one that appears in Publication 972 (Child Tax Credit). Yes, that is the worksheet to determine “earned income” (within the meaning of taxable earned income) for purposes of the Child Tax Credit, and something called the Additional Child Tax Credit.
But the Child Tax Credit is only partly refundable if you don’t have a net tax liability. The removal of the foreign earned income there has nothing to do with whether it is earned income includible in gross income, but whether it’s taxable earned income against which a credit can be offset.
The answer is obviously, no, it can’t. So the worksheet is fine for the Child Tax Credit and related items. It’s pulling out FEIE because you shouldn’t be able to generate a refundable credit off a tax liability that really isn’t there. But it’s no good for the Making Work Pay Credit, because this one is fully refundable. It is an extra $400 if you have the $6451 in earned income, aren’t MAGIed out, and have the social security number.]