[USExpat777]

Hi there,

I have some additional income which may or may not be classified as coming from a hobby. I've been reporting this income mainly on line 23 of Form 2555 as 'other income' without expenses, but most websites say this income should be filed in Schedule C. However, my overall income including this extra 'hobby' income is far below the $112k foreign earned income exclusion. Does it really matter if I file Schedule C if the income would be excluded as foreign earned income anyway? Doesn't the foreign earned income exclusion include self-employment income? If I were to start reporting this extra income in Schedule C, I imagine the reporting amount would likely be far less than what I'm currently reporting as I would then deduct expenses, but does it really matter either way given my total income would still fall far below the $112k foreign earned income exclusion?

Thanks

 

[Moulard]

I have some additional income which may or may not be classified as coming from a hobby.

Ultimately it is the answer to this question that will drive what you should be doing.

If you are not sure then you can use this checklist to help decide if it is a business or a hobby.

Income & Expenses | Internal Revenue Service

How do you distinguish between a business and a hobby?

www.irs.gov

But basically it boils down to are you doing it to make a profit?

If its a hobby then you report the income you receive on Schedule 1, Form 1040, line 21 but your expenses are considered miscellaneous itemized deductions and can no longer be deducted.
I do not think that hobby income is considered earned, (but I am happy to stand corrected, and if I have time I might dig around the regulations) and thus you would have to rely on the standard deduction or foreign tax credits to offset the potential tax liability on that income.

If it is a business, then you would report the gross income on schedule C and either use the FEIE or Foreign Tax credits to offset the income tax, and you would need to attach a certificate of coverage to avoid the Self Employment Taxes

 

[USExpat777]

Thank you, Moulard. It's nice if the extra income makes a profit, but after expenses which can be unpredictable from year to year, it often doesn't make much or any profit. I do it mainly for enjoyment and to try to cover the ongoing expenses. What is line 23 on Form 2555 for if it asks for other income as the form directions are not very clear? I understand all income should be reported, so I've reported the full income ex expenses on Form 2555, and the total income is still far below the FEIE threshold so shouldn't this be enough reporting? The Schedule C seems quite complicated in trying to figure out how to expense things so I fear trying to work it out, especially if the amount of extra income in question would not raise me above the earned income exclusion threshold. Doesn't the net income figure from Schedule C get added to line 19 of Form 2555? What is a certificate of coverage? Schedule 1, Line 21 Form 1040 is for student loan interest deductions, or did you mean a different line?

 

[Bevdeforges]

From the IRS instructions for form 2555:

Line 23.
List other foreign earned income not included on lines 19 through 22. You can write “Various” on the dotted lines to the left of the entry space if you have other foreign earned income from multiple sources.

You may also want to take a look at the instructions for line 20. Though unless the profits you make from your "hobby" activity is seriously significant (like tens or hundreds of thousands of dollars), I don't understand why you would include it at all. There is virtually no way that the IRS would have any inkling about your doing it, nor that you are being paid for it.

 

[USExpat777]

From the IRS instructions for form 2555:

You may also want to take a look at the instructions for line 20. Though unless the profits you make from your "hobby" activity is seriously significant (like tens or hundreds of thousands of dollars), I don't understand why you would include it at all. There is virtually no way that the IRS would have any inkling about your doing it, nor that you are being paid for it.

Thank you, Bev, yes I've just been reporting the figure as 'Various' on line 23. It's usually a few thousand excluding expenses but much less if expenses are taken into account. I guess I include it just to be able to prove I have reported the income somewhere in case I ever get audited. It's so stressful trying to do the 'right' thing and fearing you could still end getting in trouble or punished for it.

 

[Bevdeforges]

I guess I include it just to be able to prove I have reported the income somewhere in case I ever get audited. It's so stressful trying to do the 'right' thing and fearing you could still end getting in trouble or punished for it.

I have to say that most people's fears of being "audited" are hopelessly exaggerated. Especially those living overseas. The IRS only really "knows" about your US sources of income - via the various reporting forms like W-2's, 1099's and any other forms they've come up with in recent years. They don't have access to information like foreign salary, foreign bank or investment income or "hobby income" if it's earned overseas or comes from a foreign source. In reality, they don't have access to foreign pension information at all, so plenty of people just don't bother to report it.

It's up to you whether you want to file a "scrupulously proper" tax return or not. I'll just say that, given that the IRS pulled all their foreign staff from the Foreign consulates where they had been working, the chances of your being audited while overseas are pretty infinitesimally small.

 

[USExpat777]

I have to say that most people's fears of being "audited" are hopelessly exaggerated. Especially those living overseas. The IRS only really "knows" about your US sources of income - via the various reporting forms like W-2's, 1099's and any other forms they've come up with in recent years. They don't have access to information like foreign salary, foreign bank or investment income or "hobby income" if it's earned overseas or comes from a foreign source. In reality, they don't have access to foreign pension information at all, so plenty of people just don't bother to report it.

It's up to you whether you want to file a "scrupulously proper" tax return or not. I'll just say that, given that the IRS pulled all their foreign staff from the Foreign consulates where they had been working, the chances of your being audited while overseas are pretty infinitesimally small.

Yes I hope you're right that audit is unlikely. Really annoying though that it's the honest people that try to file correctly that end up suffering, stressing, and wasting time and money each year from all this excessive regulation. Meanwhile, I have American friends and acquaintances who escape filing entirely by not bothering to file year after year or naively believing they don't have to file. I envy them!!

 

[sam123larry]

They don't have access to information like foreign salary, foreign bank or investment income or "hobby income" if it's earned overseas or comes from a foreign source. In reality, they don't have access to foreign pension information at all, so plenty of people just don't bother to report it.

But foreign banks are reporting salaries and balances, interest income for US citizens living abroad to IRS through FATCA agreement. Aren't they?

 

[Harry Moles]

But foreign banks are reporting salaries and balances, interest income for US citizens living abroad to IRS through FATCA agreement. Aren't they?

The only thing reported under FATCA rules is year-end balance and interest/dividend income for reportable accounts only. (Many common registered tax-protected savings or investment accounts are not reported - consult your country's intergovernmental agreement for details.) Otherwise there is no reporting to the IRS of salaries, capital gains or any other type of income from non-US sources.

 

[Bevdeforges]

What Harry said. The IRS has no access to foreign information on salaries or transactions within bank accounts. You can find the various bi-lateral agreements for the individual countries on FATCA reporting online and, at least according to those, it's only the year-end balances that are reported. (And the reporting requirements are considerably less than what they expect you to report on your FBAR filings.)

 

[Chrissippus]

What Harry said. The IRS has no access to foreign information on salaries or transactions within bank accounts. You can find the various bi-lateral agreements for the individual countries on FATCA reporting online and, at least according to those, it's only the year-end balances that are reported. (And the reporting requirements are considerably less than what they expect you to report on your FBAR filings.)

However the US - France tax treaty pledges each government to cooperate fully with the other government to collect taxes. So theoretically, the IRS could ask the French fisc for details of the bank transactions of an expatriate. Probably unlikely, but impossible to say how unlikely.

 

[Bevdeforges]

However the US - France tax treaty pledges each government to cooperate fully with the other government to collect taxes. So theoretically, the IRS could ask the French fisc for details of the bank transactions of an expatriate. Probably unlikely, but impossible to say how unlikely.

One other factor to bear in mind - the US is widely known for not bothering to cooperate with requests from foreign governments regarding financial information. That does make France and other governments a whole lot less likely to bother cooperating with the IRS in return on individual cases. Add to that, the IRS tendency not to go out of their way to pursue "anomalys" in individual tax returns unless there seems to be the possibility of a large "return" (i.e. the possibility of clawing back a large amount of back taxes and penalties).

 

[Harry Moles]

However the US - France tax treaty pledges each government to cooperate fully with the other government to collect taxes. So theoretically, the IRS could ask the French fisc for details of the bank transactions of an expatriate. Probably unlikely, but impossible to say how unlikely.

FATCA data is the only thing collected in bulk and transmitted automatically. Any other information needed by the IRS would have to be requested as part of a specific, individual investigation. I imagine you'd need to owe them a whole lot of money before it was worth their while to put in that level of effort.

In terms of collections, France is one of five countries (the others being Canada, Denmark, Netherlands and Sweden) with an agreement whereby the IRS and national tax authorities will assist each other with collections, but these agreements specifically exclude collection from a country's own citizens. So a dual US-French citizen has nothing to worry about, but an expat without French citizenship could in theory find the fisc at their door on behalf of the IRS.