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Discussion Starter · #1 ·
I am US citizen living abroad for whole 2014 working as freelancer. I need to file 2014 Tax Return. I guess that I need to file following forms:

- 1040
- Schedule C (Profit or Loss From Business)
- Schedule SE (Self-Employment Tax)
- 8965 (Health Coverage Exemptions)
- 2555 (Foreign Earned Income)?
- Any other forms?

I am not sure about form 2555 (Foreign Earned Income)?

Do I need to file 2555 if I only have SE income? SE Income Tax is already covered by 1040, Schedule C and Schedule SE. Is it mandatory to file 2555 even I can’t exclude SE income?

As I understand the rules for paying self-employment tax are generally the same whether I am living in the United States or abroad. I must pay self-employment tax if net earnings from self-employment are at least $400.

I don’t even know where to enter self-employed income in 2555? Under 19? (Total wages, salaries, bonuses, commissions, etc)
 

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IRS Form 2555 relates to exclusion of foreign earned income from U.S. personal income tax, not from the U.S. Self-Employment Tax (Social Security and Medicare taxes). Whether you file Form 2555 or not (it's optional; if you qualify you can file it or not, as you choose), it doesn't have an impact on the SE Tax you may or may not owe.
 

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Form 2555 is never mandatory. Taking the Foreign Earned Income Exclusion is an option. If you don't qualify for the option or you choose not to elect it, then don't file the form.
Cheers,
Bev
 

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Discussion Starter · #4 ·
I do qualify for 2555 since being out of US for 2 years. But as I don’t have other foreign earned income except SE income –what would be the purpose of using form? On 1040 and Schedule C I am reporting foreign home and business address already.

What are pros and cons of using this form?

In case I use it where would I enter SE income? Under 19? (Total wages, salaries, bonuses, commissions, etc)
 

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You don't report your earned income on the 2555 - you determine how much of it can be "excluded" from your tax calculation (up to nearly $100,000 if you meet the conditions). If you simply report it on your 1040 and Schedule C, then it's all taxable at regular income tax rates. If you then fill out the 2555, you get to eliminate up to $100,000 (roughly) from the tax calculation.

If you follow the instructions for the 2555 (or 2555EZ), it tells you to put the amount you calculated (as being "excluded") on a particular line of the 1040 in parentheses. This allows you to subtract that from your totals before you get to AGI (Adjusted Gross Income).
Cheers,
Bev
 

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Discussion Starter · #6 ·
You don't report your earned income on the 2555 - you determine how much of it can be "excluded" from your tax calculation (up to nearly $100,000 if you meet the conditions). If you simply report it on your 1040 and Schedule C, then it's all taxable at regular income tax rates. If you then fill out the 2555, you get to eliminate up to $100,000 (roughly) from the tax calculation.
Hi Bev! Thank you for taking your time to help me out. :) I appreciate it.

My point is that self-employment income (even earned in foreign country) cannot be eliminated from amount I owe since exclusion up to 100,000 applies only to standard foreign income. Am I missing something?
 

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Take a look at Pub 54. There is some specific stuff in there about self-employment income. As long as what you earn from your business constitutes a "reasonable" compensation for what you actually do in your business, you can report it (at least on the form 2555) as "salary" income.

Take a look here: Publication 54 (2014), Tax Guide for U.S. Citizens and Resident Aliens Abroad
and Publication 54 (2014), Tax Guide for U.S. Citizens and Resident Aliens Abroad
On the second page cited, be sure to read down to the heading Earned and Unearned Income, including the following:
the part of the income that represents the value of your personal services will be treated as earned income.
Cheers,
Bev
 

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Discussion Starter · #8 ·
Publication 54 (2014), Tax Guide for U.S. Citizens and Resident Aliens Abroad

Effect of Exclusion

You must take all of your self-employment income into account in figuring your net earnings from self-employment, even income that is exempt from income tax because of the foreign earned income exclusion.

Example.

You are in business abroad as a consultant and qualify for the foreign earned income exclusion. Your foreign earned income is $95,000, your business deductions total $27,000, and your net profit is $68,000. You must pay self-employment tax on all of your net profit, including the amount you can exclude from income.
 

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Yeah - you still pay self-employment tax on your net profit. But that's self-employment tax. If you're filing a 1040 and associated forms, you're also declaring your income for US income taxes and are expected to fork over that amount, too.

There's not much you can do about the self-employment tax if you're in a country without a social security treaty with the US. But you can, at least, avoid getting hit up for income tax on the income you declare.
Cheers,
Bev
 

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So should I file form 2555 or not? Are there any other benefits of this form for Self-employed?
If you're happy to pay income tax on your self-employment income, then don't bother with 2555 at all. That's your choice. Or, if you've managed to wipe out your self-employment income tax with tax credits using the 1116 form. If the amount you earned from your self-employment falls below your personal exemption plus your standard deduction, then congratulations.
Cheers,
Bev
 

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In which country did you earn the self-employment income? I can check to see if there's a social security treaty and also probably get an approximate idea of that country's income tax rate. That'll help determine whether you should use IRS Form 1116 (and skip Form 2555) or whether Form 2555 makes more sense.
 

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Discussion Starter · #13 ·
In which country did you earn the self-employment income? I can check to see if there's a social security treaty and also probably get an approximate idea of that country's income tax rate. That'll help determine whether you should use IRS Form 1116 (and skip Form 2555) or whether Form 2555 makes more sense.
Thank you for taking your time to help me. I appreciate it. :)

I can’t use 1116 as I was not paying into foreign social security, nor this country has tax treaty with US.

I am totally confused with FEIE. You guys are suggesting that claiming FEIE in my case can reduce SE tax liability – but I just do not see how. I have run few calculations using tax software including 2555 and I am not getting any deduction.

Let’s say I made 10K abroad as self-employed USC and that’s my only income. I would file 1040, Schedule C, SE and 8965.

Form 1040
Line 7: 0 (W-2, salaries, wages)
Line 12: $10,000 (Business income from Schedule C)
Line 57: $1,412 (SE Tax Due)

What amount of tax that I owe can be excluded/deducted/reduced using form 2555 and how?

Please advise. Thank you.
 

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I am totally confused with FEIE. You guys are suggesting that claiming FEIE in my case can reduce SE tax liability – but I just do not see how. I have run few calculations using tax software including 2555 and I am not getting any deduction.
No we're not. Form 2555 has nothing at all to do with your SE tax. That's entirely separate from your income tax.

Let’s say I made 10K abroad as self-employed USC and that’s my only income. I would file 1040, Schedule C, SE and 8965.

Form 1040
Line 7: 0 (W-2, salaries, wages)
Line 12: $10,000 (Business income from Schedule C)
Line 57: $1,412 (SE Tax Due)

What amount of tax that I owe can be excluded/deducted/reduced using form 2555 and how?
If your gross income from your business is only $10,000, chances are you may not have a filing obligation at all - except to pay your SE tax. However, the fact that you're filing a 1040 at all, you need to turn the form over and follow through with the calculation to show you owe no tax.

Filing threshold for a single person under age 65 was $10,500 for 2014, though if you're married to an NRA and filing separately as married, you have to file if you've made $3950.

But you may want to take the 2555 exclusion against your earned income in order to remain eligible for the FEIE in future years when your income exceeds the filing threshold (hopefully, by a large amount someday!).
Cheers,
Bev
 

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1. Macedonia has a personal income tax rate of 10% it would appear. If you paid any Macedonian personal income tax, you can file IRS Form 1116 to take credit for that income tax. However, if you file IRS Form 2555 (probably a good idea) to exclude your earned income, you cannot include that income on Form 1116.

For example, let's suppose you had $10,000 of earned income and $500 of income from bank interest. Let's suppose you paid $1,050 in Macedonian personal income tax ($1000 on your earned income and $50 on your bank interest). If you file IRS Form 2555 to exclude your $10,000 of earned income, you then would file IRS Form 1116 to take credit for the $50 of foreign personal income tax on your interest. But you couldn't file another IRS Form 1116 to take credit for the $1000 of income tax on your earned income since you've already excluded that with Form 2555.

2. Macedonia has a social insurance tax of 26.4% total (in tax year 2015). The tax applies to up to six times the average gross salary in Macedonia. Above that there's no social insurance tax. Unfortunately Macedonia and the U.S. do not have a social security treaty -- that is correct -- so even though you contributed to the Macedonian system you'd still have a U.S. self-employment tax (SE tax) if you have self-employment income. The U.S. SE Tax is 15.3%, and it too has a cut-off when the tax rate is reduced (but not reduced to 0%). Macedonia has the goal to sign a social security treaty with the U.S., but that hasn't happened yet.

Contributions to the U.S. system will eventually make you eligible for U.S. Social Security benefits. For example, without treaty help you can qualify for retirement benefits after 10 years of non-trivial contributions. The U.S. benefits are rather generous.

As Bev mentioned, just like Macedonia U.S. personal income tax and U.S. payroll tax (the SE Tax in your case) are two separate taxes, calculated separately.
 

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Discussion Starter · #16 ·
But you may want to take the 2555 exclusion against your earned income in order to remain eligible for the FEIE in future years when your income exceeds the filing threshold (hopefully, by a large amount someday!).
Thank you for your nice wish! (I will hire CPA than haha)

Anyhow, why would I use something that I do not need right now? I don’t think I will lose option to exclude FEIE for next year (if needed) if I do not use it now. I would need FEIE only if I receive standard wages so I can exclude them from taxes up to $99,200. FEIE doesn’t help me anything with SE income.
 

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Discussion Starter · #17 ·
If you file IRS Form 2555 to exclude your $10,000 of earned income...
U.S. personal income tax and U.S. payroll tax (the SE Tax in your case) are two separate taxes, calculated separately.
BBCWatch thank you for your time and very detailed explanation. I appreciate it.
Thank you for 1116 info but as I already said I didn’t contribute to foreign social security nor this country has treaty with US. Moreover, I would rather prefer US retirement benefits credits.

I am giving up. I might need CPA to do my tax since this is so confusing.

1. On 1040 I report my U.S. personal income tax and U.S. payroll tax (the SE Tax in my case).
2. US Personal Income Tax is 0
3. US Payroll tax (SE tax) is 10,000
4. What for I need FEIE?

You are saying that I could exclude my $10,000 of earned income using 2555, but I don’t see how it changes my current scenario. Please apply any exclusion/deduction:

Form 1040
Line 7: 0 (W-2, salaries, wages)
Line 12: $10,000 (Business income from Schedule C)
Line 57: $1,412 (SE Tax Due)

1. As I understand, USC living abroad and receiving regular wages doesn’t have to pay any tax if his income was less than $99,200 claiming Foreign Earned Income Exclusion on form 2555. In addition, the taxpayer may exclude housing expenses, too.

2. On the other hand, USC who is self-employed has no benefit of using FEIE, since there is no exclusion/deduction of SE tax. Self-employed person is paying whole amount of SE earned income above $400 – no matter if they are using form 2555 or not. There is house deduction section in 2555 but running tax software I wasn’t able to reduce SE tax applying apartment rent deduction.

Only way to reduce SE Tax is through Schedule C and business expenses.
 

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I think we've covered this, but I'll try again. :)

There are two separate U.S. taxes: U.S. personal income tax and U.S. self-employment tax (Social Security and Medicare tax). IRS Form 2555 is used if you want to exclude foreign earned income from the U.S. personal income tax. It does not provide any relief from the self-employment tax. Yes, you can earn (from work) up to $100,000 (or a bit more) and, if you qualify to use IRS Form 2555 then that income is not subject to U.S. personal income tax.

A U.S. person who is self-employed still can benefit substantially from the FEIE because of the personal income tax relief. But yes, that's correct, the FEIE does not have any impact on the SE Tax.

You can also reduce or eliminate the SE Tax by not being self-employed. If you work for an employer, you're not (generally) subject to the SE Tax. Of course that would also reduce or eliminate your future U.S. Social Security and Medicare benefits, so you get what you pay for. ;)
 
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