Enrolled Agent Classes Clarify Factors Relating to Foreign Income ...

Just because some tax situations are not common does not mean they are too rare to thoroughly study. For example, an enrolled agent demonstrates a high level of expertise by preparing for situations involving taxpayers with income from foreign sources. There are only a few factors to memorize but they are critical to capturing clients with overseas earnings. In many areas of the country, taxpayers with this situation are not at all unusual.

The basic rule covered in enrolled agent classes is that all US citizens and resident aliens owe tax on income from every domestic or foreign source. This can require conversion to US dollars if amounts are stated in foreign currencies. The applicable exchange rate applied is the one prevailing at the time of a transaction. Locating historical currency conversion ratios is therefore sometimes a necessary part of enrolled agent work.

Payment of foreign taxes is also converted to US dollars. These amounts affect the tax return filed with the IRS. The total foreign tax paid is credited against US tax liability on the same income. This avoids double taxation. The required form to claim a foreign tax credit ? and how to prepare it ? is taught in enrolled agent education.

Some special tax rules apply when US citizens or resident aliens earn their foreign income by living overseas. In most cases, these taxpayers are entitled to exclude some of their foreign earned income from US tax. They may also receive an exclusion for the cost of foreign housing. The exclusions are only available to individuals who establish a foreign tax home. Transitory workers don?t qualify.

Understanding the IRS rules that define tax home is an important part of enrolled agent study. The tax home is the area of a taxpayer?s main employment, business or duty post. This can be a distinctive location from where the taxpayer resides.

A foreign tax home is established by uninterrupted residency in another country for the entire year or physical presence there for at least 330 days during 12 consecutive months. A US taxpayer must receive earned income in a foreign country and establish a tax home there in order to qualify for the foreign income exclusion. Traveling investors are out of luck, unless they convert their experience into earned income.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Source: http://ffaadmin.wordpress.com/2011/08/09/enrolled-agent-classes-clarify-factors-relating-to-foreign-income-2/

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