Foreign Earned Income Exclusion And Its Effect on Taxability Of Social Security

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Topic Author
Arby
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Foreign Earned Income Exclusion And Its Effect on Taxability Of Social Security

Post by Arby »

I'm a US citizen living overseas collecting Social Security. I'm considering doing some online teaching for a non-USA company.

Let's say I'm collecting 20K a year in Social Security and 30K a year from online teaching. My understanding is that there would be zero tax on my foreign earned income since the exclusion limit is above 100K.

My understanding is that my Social Security is not taxable if 50% of my SS + 100% of my other income is less than 25K.

Would my Social Security calculation be 50% of 20K + 0 = 10K which is less than 25K so none of my SS would be taxable?

Or would it be 50% of 20K + 100% of 30K = 40K which is more than 25K so a portion of SS would be taxable?
Topic Author
Arby
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Re: Foreign Earned Income Exclusion And Its Effect on Taxability Of Social Security

Post by Arby »

HueyLD wrote: Tue Sep 14, 2021 12:54 pm #2.

See https://www.irs.gov/pub/irs-pdf/p915.pdf
Thanks Huey; that cleared it up.
Exclusions. When making this comparison, don’t reduce
your other income by any exclusions for:
• Interest from qualified U.S. savings bonds,
• Employer-provided adoption benefits,
• Interest on education loans,
Foreign earned income or foreign housing, or
• Income earned by bona fide residents of American
Samoa or Puerto Rico.
Children's benefits. The rules in this publication appl
In actuality my income expectation is more likely around 20K or less.

I was thinking that instead of claiming the Foreign Exclusion to instead consider it as Self Employment income. I do realize that there would be FICA payments involved but perhaps those payments could be recouped over my lifetime in higher SS benefits as I currently don't have 35 years with wages.

So my two new questions would be:

1) if I contributed 7K to a TIRA would my income for SS taxability be my entire income or rather the income minus 7K?

2) Is online teaching for a company outside the USA with limited documentation considered Foreign Income or Self Employment? Does it matter if my compensation is made to a US bank or a foreign bank?
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HueyLD
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Re: Foreign Earned Income Exclusion And Its Effect on Taxability Of Social Security

Post by HueyLD »

You asked:

“So my two new questions would be:

1) if I contributed 7K to a TIRA would my income for SS taxability be my entire income or rather the income minus 7K?

2) Is online teaching for a company outside the USA with limited documentation considered Foreign Income or Self Employment? Does it matter if my compensation is made to a US bank or a foreign bank?”

For (1), do not reduce your SS taxable income by the $7k.

For (2), your online teaching for a foreign company done outside of the USA looks like foreign earned income and the FEI can be earned by an employee or a self employed person. Where the compensation is sent does not matter.

IRS references for you:

Worksheet 1 from Pub 915.

Form 1040 https://www.irs.gov/pub/irs-pdf/f1040.pdf

Schedule 1 of Form 1040 https://www.irs.gov/pub/irs-pdf/f1040s1.pdf
typical.investor
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Re: Foreign Earned Income Exclusion And Its Effect on Taxability Of Social Security

Post by typical.investor »

HueyLD wrote: Tue Sep 14, 2021 2:45 pm
For (2), your online teaching for a foreign company done outside of the USA looks like foreign earned income and the FEI can be earned by an employee or a self employed person. Where the compensation is sent does not matter.
Yeah and if it's self employment then pay self-employment taxes to the US and claim the FEIE at the same time.

If you are paying foreign social security taxes, you might be able to obtain a certificate of coverage from them and you won't have to pay the US self-employment taxes. It depends if there is a totalization agreement and what it says.

For example see https://www.greenbacktaxservices.com/bl ... ng-abroad/
Topic Author
Arby
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Re: Foreign Earned Income Exclusion And Its Effect on Taxability Of Social Security

Post by Arby »

typical.investor wrote: Wed Sep 15, 2021 4:55 am
HueyLD wrote: Tue Sep 14, 2021 2:45 pm
For (2), your online teaching for a foreign company done outside of the USA looks like foreign earned income and the FEI can be earned by an employee or a self employed person. Where the compensation is sent does not matter.
Yeah and if it's self employment then pay self-employment taxes to the US and claim the FEIE at the same time.

If you are paying foreign social security taxes, you might be able to obtain a certificate of coverage from them and you won't have to pay the US self-employment taxes. It depends if there is a totalization agreement and what it says.

For example see https://www.greenbacktaxservices.com/bl ... ng-abroad/
What determines if it is self employment? I would be paid based on the number of lessons that I teach which would vary from week to week.

Not sure if it matters but I live in Thailand but the company that I would probably work for is from China.
typical.investor
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Re: Foreign Earned Income Exclusion And Its Effect on Taxability Of Social Security

Post by typical.investor »

It doesn’t sound to me like you are. Per the IRS:

Generally, you are self-employed if any of the following apply to you.

You carry on a trade or business as a sole proprietor or an independent contractor.
You are a member of a partnership that carries on a trade or business.
You are otherwise in business for yourself (including a part-time business).


https://www.irs.gov/businesses/small-bu ... lfEmployed
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HueyLD
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Re: Foreign Earned Income Exclusion And Its Effect on Taxability Of Social Security

Post by HueyLD »

Arby’s asked: “ What determines if it is self employment? I would be paid based on the number of lessons that I teach which would vary from week to week.”

Here are IRS guidelines and a very good source:

“ FS-2017-09, July 20, 2017

The Internal Revenue Service reminds small businesses of the importance of understanding and correctly applying the rules for classifying a worker as an employee or an independent contractor. For federal employment tax purposes, a business must examine the relationship between it and the worker. The IRS Small Business and Self-Employed Tax Center on the IRS website offers helpful resources.

Worker classification is important because it determines if an employer must withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on wages paid to an employee. Businesses normally do not have to withhold or pay any taxes on payments to independent contractors. The earnings of a person working as an independent contractor are subject to self-employment tax.

The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work, not what will be done and how it will be done. Small businesses should consider all evidence of the degree of control and independence in the employer/worker relationship. Whether a worker is an independent contractor or employee depends on the facts in each situation.

Help with Deciding

To better determine how to properly classify a worker, consider these three categories – Behavioral Control, Financial Control and Relationship of the Parties.

Behavioral Control:

A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised. Behavioral control categories are:

Type of instructions given, such as when and where to work, what tools to use or where to purchase supplies and services. Receiving the types of instructions in these examples may indicate a worker is an employee.

Degree of instruction, more detailed instructions may indicate that the worker is an employee. Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.

Evaluation systems to measure the details of how the work is done points to an employee. Evaluation systems measuring just the end result point to either an independent contractor or an employee.

Training a worker on how to do the job -- or periodic or on-going training about procedures and methods -- is strong evidence that the worker is an employee. Independent contractors ordinarily use their own methods.

Financial Control:

Does the business have a right to direct or control the financial and business aspects of the worker's job? Consider:

Significant investment in the equipment the worker uses in working for someone else.

Unreimbursed expenses, independent contractors are more likely to incur unreimbursed expenses than employees.

Opportunity for profit or loss is often an indicator of an independent contractor.

Services available to the market. Independent contractors are generally free to seek out business opportunities.

Method of payment. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time even when supplemented by a commission. However, independent contractors are most often paid for the job by a flat fee.

Relationship:

The type of relationship depends upon how the worker and business perceive their interaction with one another. This includes:

Written contracts which describe the relationship the parties intend to create. Although a contract stating the worker is an employee or an independent contractor is not sufficient to determine the worker’s status.

Benefits. Businesses providing employee-type benefits, such as insurance, a pension plan, vacation pay or sick pay have employees. Businesses generally do not grant these benefits to independent contractors.

The permanency of the relationship is important. An expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally seen as evidence that the intent was to create an employer-employee relationship.
Services provided which are a key activity of the business. The extent to which services performed by the worker are seen as a key aspect of the regular business of the company.”
Topic Author
Arby
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Re: Foreign Earned Income Exclusion And Its Effect on Taxability Of Social Security

Post by Arby »

Thank you for all the informative replies. :happy

If my SS was 20K so 10K would be half, my teaching income 16K, and I had a capital loss of 2K would any of my SS be taxed?

Is there anything that could get me below the 25K threshold?
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grabiner
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Re: Foreign Earned Income Exclusion And Its Effect on Taxability Of Social Security

Post by grabiner »

Arby wrote: Fri Sep 17, 2021 12:55 pm Thank you for all the informative replies. :happy

If my SS was 20K so 10K would be half, my teaching income 16K, and I had a capital loss of 2K would any of my SS be taxed?

Is there anything that could get me below the 25K threshold?
The capital loss creates negative adjusted gross income, so your other income plus half your SS would be $24K and nothing would be taxable.

Without the capital loss, the total would be $26K, and then $500 of SS would be taxable. (A common misconception is that 50% of the SS is taxable for income in that range. What actually happens is that each dollar beyond the $25K limit makes 50 cents of SS taxable, with a maximum taxable amount of 50% of SS until you reach the next limit at $34K. Beyond $34K, every dollar makes 85 cents of SS taxable, with a maximum taxable amount of 85% of SS.)
Wiki David Grabiner
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