Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Case Study: Taxation of Foreign Income for U . S . Citizens and Residents Scenario: Sarah is a U . S . citizen who has

Case Study: Taxation of Foreign Income for U.S. Citizens and Residents
Scenario:
Sarah is a U.S. citizen who has been living and working in Germany for the past five years. During her time in Germany, she has earned income from her job as a software engineer, as well as rental income from a property she owns in the United Kingdom. As tax season approaches, Sarah is unsure about how her foreign income will be taxed by the U.S. government.
Analysis:
Foreign Earned Income Exclusion:
U.S. citizens and residents living abroad, like Sarah, may be eligible for the Foreign Earned Income Exclusion (FEIE). This allows them to exclude a certain amount of their foreign earned income from U.S. taxation.
For tax year 2023, the maximum exclusion amount is $108,700. This means that Sarah can exclude up to $108,700 of her foreign earned income from her U.S. tax return.
Housing Exclusion or Deduction:
In addition to the FEIE, Sarah may also qualify for the Foreign Housing Exclusion or Deduction. This allows her to exclude or deduct certain housing expenses incurred while living abroad.
The housing exclusion is limited to 30% of the FEIE amount, while the housing deduction is subject to various limitations based on factors like income and location.
Foreign Tax Credit:
If Sarah pays taxes to a foreign country on her foreign earned income, she may be eligible for the Foreign Tax Credit (FTC). This allows her to offset her U.S. tax liability by the amount of foreign taxes paid.
Sarah will need to file Form 1116 to claim the foreign tax credit, providing details of the foreign taxes paid and the income to which they relate.
Reporting Foreign Assets:
Sarah is also required to report any foreign financial accounts or assets that she owns or has signature authority over if their aggregate value exceeds certain thresholds.
Failure to report foreign assets can result in significant penalties, so Sarah must ensure she complies with all reporting requirements.
Question:
Based on the case study, which tax provision allows U.S. citizens and residents living abroad to exclude a certain amount of their foreign earned income from U.S. taxation?
A) Foreign Tax Credit
B) Foreign Earned Income Exclusion
C) Foreign Housing Exclusion
D) Foreign Housing Deduction
image text in transcribed

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Global Financial Accounting And Reporting Principles And Analysis

Authors: Peter Walton, Walter Aerts

2nd Edition

1408017725, 978-1408017722

More Books

Students also viewed these Accounting questions

Question

What opportunities exist for raises and advancement?

Answered: 1 week ago