Other Income
About Other Income
• Additional resources listed in L&LT “References” tab
• Review all tips and cautions in the lesson
• Read all examples and sample interviews
• We will review answers to each exercise
2
Other Income
Objectives – Other Income
Determine:
• Other types of income and how to report them
• Determine the requirements for the cancellation of debt on
no
nbusiness credit card debt when preparing tax returns
• Determine when canceled credit card debt is included in gross inco
me
on
Form 1040, Schedule 1
• How to properly report income earned from worldwide sources
• Who is eligible for the foreign earned income exclusion
• How to calculate the excludible amount using Form 2555, Foreign
E
arned Income
• Time Required: 30 minutes
Other Income
3
Topics
• Other Income
• Nonbusiness Credit Card Debt
• Worldwide Income
• Foreign Earned Income Exclusion
• Period of Stay
• Qualifying Income
• Reporting Other Income
4
Other Income
Key Terms
Definitions are always available in the L&LT online Glossary.
• Blocked Income
• Bona Fide Residence Test
• Coverdell ESA
• Foreign Earned Income Exclusion
• Foreign Tax Credit
• Period of Stay
• Physical Presence Test
• Medicaid Waiver Payments
• Regular Place of Abode
• Tax Home
• Worldwide Income
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Other Income
Other Income
6
Other Income
What are some examples?
• Prizes and awards
• Gambling winnings
(including lotteries and raffles)
• Cash for Keys
• Jury duty pay
• Alaska Permanent Fund dividends
• Nonbusiness credit card debt
Cancellation
Other Income
See Publication 4491 for details on these types of other income:
• Health Savings Account distributions
• Qualified Medicaid Waiver Payments
• Distributions from ABLE accounts
• Coverdell ESA and a 529 plan
Other examples of other income are:
• Gambling Winnings, Cash for Keys, Penal Income,
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Other Income
Cancellation of Debt – Nonbusiness Credit Card Debt
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Other Income
• If a taxpayer receives Form 1099-C for canceled credit card debt and
was solvent, all the canceled debt will be included on Form 1040, Other
Income line.
• Generally, taxpayers must include all canceled amounts (even if less
than $600) on the Other Income line of Form 1040
• Review the
Insolvency Determination Worksheet
Worldwide Income
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Other Income
• For U.S. citizens and resident aliens, income earned outside the U.S. is
subject to the same taxes and filing requirements as U.S. income.
• Amounts reported on a U.S. return must be converted to U.S. dollars.
What exchange rate do you use?
• Use the rate in effect when the income was received.
• The average annual exchange rate can be used if:
• Foreign income was received evenly throughout the year, and
• The foreign exchange rate was relatively stable during the year
• Monthly exchange rates can be used for foreign income earned evenly
for one or more months, but not the whole year.
Foreign Earned Income Exclusion
• Allows qualified taxpayers to voluntarily exclude foreign earnings from
taxable income – amount is indexed to inflation, updated yearly
• Does not apply to members of Armed Forces or U.S. governmen
t
e
mployees
• Taxpayers cannot claim the earned income credit or foreign tax credi
t
if
using this exclusion
• The term “foreign country” does n
ot
i
nclude U.S. territories or possessions –
see Chapter 4 of
Pub 54 for details
• Claimed using
Form 2555
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Other Income
Current year not available
Foreign Earned Income Exclusion
• To be eligible, the taxpayer must:
• Demonstrate that his or her tax home is in a foreign country
• Meet a period of stay requirement – either the bona fide residence
test or the physical presence test
• Have income that qualifies as foreign earned income
• Married couples – requirements must be met separately for each
person
• Taxpayers whose “regular place of abode” is in the U.S. cannot be
considered to have a foreign tax home and would not qualify for the
exclusion – see
Pub 54 for details
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Other Income
Period of Stay
• What is required to meet the period of stay requirement?
• Bona fide residence test – taxpayer must have set up permanent
quarters in a foreign country for an entire, uninterrupted tax year.
• Physical presence test – taxpayers must be physically present in a
foreign country 330 full days in 12 consecutive months
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Other Income
Qualifying Income
• Must be earned income for services (other than military or U.S.
government) performed in a foreign country
• Salaries
• Wages
• Commissions
• Professional fees
• Self-employment income
• What types of income would not qualify?
• Dividends, interest, capital gains, alimony, social security benefits,
pensions, annuities
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Other Income
Reporting Other Income
• Reporting on Form 2555 using TaxSlayer
• Link to Form 2555
• The exclusion amount is calculated by TaxSlayer and entered as a
negative number on Form 1040, Other Income line.
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Other Income
Out of Scope for this Lesson:
• Distributions from an ABLE account in which the funds were not fully
used for qualified disability expenses
• Distributions from Educational Savings Accounts in which the:
• Funds were not used for qualified education expenses, or
• Distribution was more than the amount of the qualified expenses
• Taxpayers who are insolvent and had debt canceled
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Other Income
Summary
• Other Income includes any taxable income for which there is not a
specific line identified on Form 1040. This income is reported on Form
1040, Schedule1.
• U.S. citizens and resident aliens are taxed on worldwide income, and
must file a U.S. tax return even if all the income is from foreign sources,
and even if they paid (or will pay) taxes to another country.
• Amounts received in foreign currency must be converted to U.S. dollars
for reporting on the return. Use the exchange rate prevailing when the
taxpayer receives the pay.
• If the taxpayer is eligible to exclude some or all of foreign earned
income, complete Forms 2555. The excludible amount will be entered
as a negative number on Schedule 1.
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Other Income