Accepting Bonus from former US employer while on AOS

[Jojo92122 1,924]

http://www.irs.gov/newsroom/article/0,,id=108276,00.html

Five Facts about the Foreign Earned Income Exclusion

IRS Tax Tip 2010-57

If you are living and working abroad you may be entitled to the Foreign Earned Income Exclusion. Here are five important facts from the IRS about the exclusion:

The Foreign Earned Income Exclusion United States Citizens and resident aliens who live and work abroad may be able to exclude all or part of their foreign salary or wages from their income when filing their U.S. federal tax return. They may also qualify to exclude compensation for their personal services or certain foreign housing costs.

The General Rules To qualify for the foreign earned income exclusion, a U.S. citizen or resident alien must have a tax home in a foreign country and income received for working in a foreign country, otherwise known as foreign earned income. The taxpayer must also meet one of two tests: the bona fide residence test or the physical presence test.

The Exclusion Amount The foreign earned income exclusion is adjusted annually for inflation. For 2009, the maximum exclusion is up to $91,400 per qualifying person.

Claiming the Exclusion The foreign earned income exclusion and the foreign housing exclusion or deductions are claimed using Form 2555, Foreign Earned Income, which should be attached to the taxpayer’s Form 1040. A shorter Form 2555-EZ, Foreign Earned Income Exclusion, is available to certain taxpayers claiming only the foreign income exclusion.

Taking Other Credits or Deductions Once the foreign earned income exclusion is chosen, a foreign tax credit or deduction for taxes cannot be claimed on the excluded income. If a foreign tax credit or tax deduction is taken on any of the excluded income, the foreign earned income exclusion will be considered revoked.

For more information about the Foreign Earned Income Exclusion see Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad and the instructions for Form 2555 or Form 2555-EZ. Forms and publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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http://www.irs.gov/businesses/small/international/article/0,,id=96960,00.html

Foreign Earned Income Exclusion - Bona Fide Residence Test

You meet the bona fide residence test if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. You can use the bona fide residence test to qualify for the exclusions and the deduction only if you are either:

A U.S. citizen, or

A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect.

You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year.

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http://www.irs.gov/businesses/small/international/article/0,,id=96968,00.html

Foreign Earned Income Exclusion - Physical Presence Test

You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. The 330 qualifying days do not have to be consecutive. The physical presence test applies to both U.S. citizens and resident aliens.

The physical presence test is based only on how long you stay in a foreign country or countries. This test does not depend on the kind of residence you establish, your intentions about returning, or the nature and purpose of your stay abroad. However, your intentions with regard to the nature and purpose of your stay abroad are relevant in determining whether you meet the tax home test explained under Tax Home in Foreign Country in Publication 54.

330 Full Days

Generally, to meet the physical presence test, you must be physically present in a foreign country or countries for at least 330 full days during the 12-month period. You can count days you spent abroad for any reason. You do not have to be in a foreign country only for employment purposes. You can be on vacation time.

You do not meet the physical presence test if illness, family problems, a vacation, or your employer's orders cause you to be present for less than the required amount of time. Also, if you are present in a foreign country in violation of U.S. law, you will not be treated as physically present in a foreign country while you were in violation of the law. Income that you earn from source within such a country for services performed during a period of violation does not qualify as foreign earned income.

However, the minimum time requirement can be waived if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. You must be able to show that you reasonably could have expected to meet the minimum time requirements if not for the adverse conditions, and that you had a tax home in the foreign country and were a bona fide resident of, or physically present in, the foreign country on or before the beginning date of the waiver.

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At the end of the 2011 tax year (Dec. 31, 2011), the OP will not meet the bona fide residence rule because she will not be a Philippine resident for the entire year, and she will not meet the physical presence test because she will not be in the Philippines for more than 330 days in 2011. She must meet one of these two tests in order to qualify of the foreign earned income exclusion. She can't meet either test so she can't take the exclusion.

[William33 110]

It is my understanding that income earned overseas (US Citizen or Perm Resident) is exempt from US taxation up to USD91,500. Given that the bonus was earned while meeting the overseas residency requirement, this income should apply for the exemption. In fact, the income was earned before the US residency applied and was accrued income. Suggest you consult a tax attorney or tax consultant.

See here for details: http://www.irs.gov/publications/p54/ar01.html

Edited July 7, 2011 by William33

[VanessaTony 3,567]

Everyone is talking about taxation now so just to state it again -- you are being paid from your job when you were working BEFORE so it is perfectly fine and legal.

In regards to taxation, again it was "earned" when you were working overseas and is therefore considered foreign income. Consider asking your employer to have your "period of employment" or something listed so that it's obvious it's from previous employment, and perhaps the location you worked at. You should be fine but I would suggest that when you file taxes next year (for 2011) that you see a tax consultant and don't try and do it yourself... so you're sure.

[Jojo92122 1,924]

It is my understanding that income earned overseas (US Citizen or Perm Resident) is exempt from US taxation up to USD91,500. Given that the bonus was earned while meeting the overseas residency requirement, this income should apply for the exemption. In fact, the income was earned before the US residency applied and was accrued income. Suggest you consult a tax attorney or tax consultant.

See here for details: http://www.irs.gov/publications/p54/ar01.html

The foreign earned income exclusion is available only if the taxpayer can meet the Bona Fide Test or the Physical Presence Test. The OP does not meet either of those tests so the income is not exempt.

This income is taxable in the US because the OP's US tax year started on 1/11/2011, and the income was received after that date.

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P.S. I have a graduate tax degree, and I prepare tax returns for my clients.

Edited July 7, 2011 by Jojo92122

[William33 110]

The foreign earned income exclusion is available only if the taxpayer can meet the Bona Fide Test or the Physical Presence Test. The OP does not meet either of those tests so the income is not exempt.

This income is taxable in the US because the OP's US tax year started on 1/11/2011, and the income was received after that date.

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P.S. I have a graduate tax degree, and I prepare tax returns for my clients.

How much experience do you have with respect to foreign earned income and accrued income from that work? Having worked for the USG overseas for many years (all taxable income) and for a foreign company overseas (actual income and accrued bonus paid in the following tax year was not taxable). I added a written explanation with my tax form and did not get taxed or audited.

[David & Kezia 25]

How much experience do you have with respect to foreign earned income and accrued income from that work? Having worked for the USG overseas for many years (all taxable income) and for a foreign company overseas (actual income and accrued bonus paid in the following tax year was not taxable). I added a written explanation with my tax form and did not get taxed or audited.

Hi William! What did you write in your explanation?

[William33 110]

Hi William! What did you write in your explanation?

Regret the delay in responding, as I missed your response. I simply provided a letter explaining the details of the salary earned in the first tax year and a copy of the original tax return along with my amended tax return.. I also added the letter from the company describing the accrued income (bonus), based upon Corporate earnings which could not be paid out until February of the following year. This letter also mentioned required shareholder meetings, making final determinations of the bonus structure. It is somewhat complicated, but accrued overseas income as described is not taxable; if documented appropriately and if it does not exceed IRS income thresholds.

Edit to add: In your case, while not a Permanent Resident, you earned the bonus as accrued income. This is not required to be reported, but you may wish to do so to CYA.

Edited August 19, 2011 by William33