I received a check from Uncle Sam today for $74.40, which I take to be the part of the Making Work Pay Credit (26 U.S.C. section 36A) that I claimed for 2010.
As everyday readers know, I blogged about this issue more than practically anyone on the internet, but it still seems to me strange how foreign earned income suddenly became not includible in gross income. This “not includible” was the tax jargon for the parsonage allowance (26 U.S.C. section 107). Priests, ministers, rabbis, imams, etc. don’t have to include the value of what their denominations’ followers pay them in terms of housing. It is a benefit meant to make it less costly to hire a minister, and to some extent, keep the government out of influencing religion.
Sometime in the late Bush administration, an IRS functionary decided that foreign earned income, up to the $90 something thousand amount, was also “not includible” in gross income. But this is just plain wrong. It is part of your gross income, but you are afforded an exclusion, if you meet the terms, because it is foreign earned income.
The reason you can’t get the earned income credit (26 U.S.C. section 32) using this foreign earned income is that the section allowing for an earned income credit specifically excludes foreign earned income. Not because it isn’t earned income, but because the statute expressly won’t let you claim the earned income credit. They had to write it that way, (and this was way back in the 1980’s), because foreign earned income is earned income.
If you noticed, the service sends you to the Additional Child Tax Credit worksheet to determine your 2009 or 2010 Making Work Pay Credit. So it looks like this has all been thought through, even though, unusually, you are using some other credit’s worksheet to calculate the Making Work Pay.
But the reason you can’t get Additional Child Tax Credit (ACTC) if you have foreign earned income is that ACTC is based on your taxable income. Not gross, or adjusted gross. Taxable. Well, the Foreign Earned Income Exclusion wipes out that portion of taxable income.
Well, I wish it were a big enough problem to make something of. But the difference in what I got gypped is probably not worth it. The Service pretty much stuck itself the first time someone who doesn’t report foreign earned income compares it to the parsonage allowance (where there is no special form to claim the exclusion.) A conservative judge can simply say it doesn’t make sense why the Form 2555 has to be filled out.
How the $74, you ask? Well, I think it’s the amount you get for the expenses to leave a country. The Service lets you take those, and I suppose those are the only ones the Service counts as “earned income”, because they are being excluded for other reasons, not FEIE! (So it’s maybe 6.2% of a number like $1200.)
I would love to see some tax reform.
[Update: It almost goes without saying that, if you are one of my Japan-side readers, or from anywhere else in the world, and an American, you must file a tax return unless you have a very, very low income (like $9,000). I would advise filing a tax return in all instances, simply because it keeps you straight and starts the clock ticking on any potential audit. If you don’t file, the tax year is, like the old Denny’s Restaurant sign used to say: ALWAYS OPEN. If you do file, and you don’t do any really big frauds on it, the tax year is open for three years after the date your filed the return. If you file early, then after the date the return was due.
With the IRS going after the big cheeses hiding huge amounts in Switzerland or India, don’t think they won’t be asking you for your English teacher return sometime in the 2010’s. When all this talk out of Congress is about “closing loopholes”, you can be sure that one of them will be going harder after non-filers. It’s so easy for the Service to figure out that you were a non-filer in Japan.
When you are out of the country, you have until June 15 to file.]
[Update #2, 4/15/11: Yes, this thing is just whacked. If you look how foreign earned income earners are supposed to calculate the credit, the IRS sends you over to the Additional Child Tax Credit. The statute for this (26 U.S.C. section 24) is using totally different language, about taking 15% of tax income, etc. Ah, what a mess. The Bush Administration couldn’t do a lot of things right, and poor Obama is stuck cleaning so much of it up.]