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As background, one would think that a young person's tax returns would be simple, given his low income. DS, however, has done some freelance work, and also dabbled in stocks. I've been doing his taxes (form 1040 and sched's C-EZ, D, and SE) and tracking his stock cost bases, with help from you all, so thanks for your assistance thus far.

Now a new wrinkle. DS has graduated college, and will be heading to China next month to teach English for a year. He will be paying both Chinese and US income taxes. His host school in China will help him with the Chinese taxes, and here are my questions regarding US taxes:

1. What will be his income in US Dollars? Specifically, since the USD/RMB exchange rate fluctates daily, should he maintain a spreadsheet, tracking the converted amount each time he receives a paycheck? Or can he just sit down on December 31, add up all his paychecks thus far in RMB, and then convert to USD at that point?

2. On US taxes, is there a credit for the Chinese taxes paid? If so, where?

3. Will his Chinese income be subject to Social Security tax (Sched SE)?

4. Will he be allowed to contribute to his Roth IRA using his Chinese income?

5. His host school will provide housing. Is that a taxable benefit? If so, how does he determine the taxable value?

6. Can he deduct airfare there & back? At one point it appeared airfare would be reimbursed, so we were just going to ignore it for tax purposes. Now it looks like he will receive a lump sum at the end of each semester, which will be approximately but not exactly the amount of airfare. So I think he should treat the air fare (deduction) and lump sums (income) separately.

7. Can he deduct the application fee paid to the recruiter (www.chineseculturecenter.org)? This was a required expense.

8. Can he deduct the cost of his TEFL (Teaching English as a Foreign Language) training? The recruiter said that if he didn't have a TEFL certificate, he could learn on the job and they'd give him the certificate at the end of the year, but he didn't feel that would be fair to himself or his students, so he took a summer class independently (www.oxfordseminars.com).

Thanks,
YG
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As background, one would think that a young person's tax returns would be simple, given his low income. DS, however, has done some freelance work, and also dabbled in stocks. I've been doing his taxes (form 1040 and sched's C-EZ, D, and SE) and tracking his stock cost bases, with help from you all, so thanks for your assistance thus far.

Now a new wrinkle. DS has graduated college, and will be heading to China next month to teach English for a year. He will be paying both Chinese and US income taxes. His host school in China will help him with the Chinese taxes, and here are my questions regarding US taxes:


You and he need to study IRS Pub. 54, Tax Guide for US Citizens and Resident Aliens Abroad, www.irs.gov/pub/irs-pdf/p54.pdf. You'll find answers to your questions (and those you haven't thought to ask) there. Many of the answers will be proscribed by any tax treaties in effect between China and the US (details can be found in IRS Pub. 901, US Tax Treaties, www.irs.gov/pub/irs-pdf/p901.pdf)

1. What will be his income in US Dollars? Specifically, since the USD/RMB exchange rate fluctates daily, should he maintain a spreadsheet, tracking the converted amount each time he receives a paycheck? Or can he just sit down on December 31, add up all his paychecks thus far in RMB, and then convert to USD at that point?

He should convert each taxable event at that day's exchange rate.

2. On US taxes, is there a credit for the Chinese taxes paid? If so, where?

Possibly. As you read through the Pubs you'll discover that he may be able to exclude some/all of his foreign income from US taxation. If not, he can claim a credit for foreign taxes paid using Form 1116.

3. Will his Chinese income be subject to Social Security tax (Sched SE)?

Probably not, since it's not self-employment income and should be subject to the Chinese equivalent (if there is one). The details will be found in the tax treaty.

4. Will he be allowed to contribute to his Roth IRA using his Chinese income?

Not to the extent that it isn't taxable income in the US. In other words, if his Chinese income is fully excludible from US taxation, then it doesn't qualify for contribution to an IRA. If he reports the income here and takes the foreign tax exclusion, then it would qualify for IRA contribution. You can't know which way is best until you run the numbers.

5. His host school will provide housing. Is that a taxable benefit? If so, how does he determine the taxable value?

In principle it is a taxable benefit and the host school will have to establish the value. In practice, he may be eligible for a foreign housing exclusion or deduction. Details can be found in the Pubs.

6. Can he deduct airfare there & back? At one point it appeared airfare would be reimbursed, so we were just going to ignore it for tax purposes. Now it looks like he will receive a lump sum at the end of each semester, which will be approximately but not exactly the amount of airfare. So I think he should treat the air fare (deduction) and lump sums (income) separately.

The first trip over could be considered moving expense subject to the rules provided in Pub. 54, or it could be reimbursible employee expense. Trips back and forth to the US subsequent to this would be personal expense or reimbursible employee expense. The final trip home would either be moving expense (to a new job) or reimbursible employee expense.

7. Can he deduct the application fee paid to the recruiter (www.chineseculturecenter.org)? This was a required expense.

Yes. It's a miscellaneous itemized deduction subject to 2%AGI threshhold.

8. Can he deduct the cost of his TEFL (Teaching English as a Foreign Language) training? The recruiter said that if he didn't have a TEFL certificate, he could learn on the job and they'd give him the certificate at the end of the year, but he didn't feel that would be fair to himself or his students, so he took a summer class independently (www.oxfordseminars.com).

Generally, no. Education expense that qualifies you for a new profession is non-deductible. However, if the training qualifies for one of the newer education benefits, he may be able to take advantage of that. See IRS Pub. 970, Tax Benefits for Education, www.irs.gov/pub/irs-pdf/p970.pdf for more information.

Ira
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it's probably going to be way simpler than you think. as you will learn from publication 54, the foreign earned income exclusion (form 2555) will exclude over $87,000. so most likely you aren't going to have to worry about credit for chinese taxes or other deductions.

c.
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Thanks, Ira. I've taken a quick peek at the links; they're over 100 pages of small print, so I'll be perusing them over the next few days. (Note to those whose English teacher was not Mrs. Ostrovsky: "peruse" does not mean what you probably think it means.)

Meanwhile, regarding the following, from page 4 of pub 901:

...Pay received by residents of the People’s Republic of China for services performed as employees ... in the United States is exempt from U.S. tax if: ...

This deals with Chinese working in the U.S., not Americans working in China, correct? I just want to verify, because "resident" might be open to interpretation (or it might be defined elsewhere, and I haven't gotten to it yet). My interpretation is that even though DS will be residing in China, as a U.S. citizen on a U.S. Passport with Chinese worker's visa, he is NOT a "resident" of China.
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...foreign earned income exclusion (form 2555) will exclude over $87,000...

Wow. His income will be about $700/month (Sept-June), so even counting the value of the apartment it will be many orders of magnitude below $87k.

He's never had to file state income tax forms (income below the minimum), and wouldn't have to file Fed'l either, except the minimum for Sched SE is $400, and his income has been over that.
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One other thing to keep in mind is that you can figure the taxes both ways - Excluding foreign income if eligible, or including foreign income and getting the credit for foreign taxes paid.

With one return I did for 2007 and 2008 taxes for a client, they were better off using the foreign income exclusion one year and taking the foreign tax paid credit the other.
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One other thing to keep in mind is that you can figure the taxes both ways - Excluding foreign income if eligible, or including foreign income and getting the credit for foreign taxes paid.

I stated that in my long response.

Ira
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Meanwhile, regarding the following, from page 4 of pub 901:

...Pay received by residents of the People’s Republic of China for services performed as employees ... in the United States is exempt from U.S. tax if: ...

This deals with Chinese working in the U.S., not Americans working in China, correct?


Correct. That section of Pub. 901 details circumstances where personal service income earned in the US may be exempt from US taxation for individuals who are considered "residents" (could be citizens, resident aliens, or whatever criteria that country uses to define residents) of specific countries.

Ira
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it's probably going to be way simpler than you think. as you will learn from publication 54, the foreign earned income exclusion (form 2555) will exclude over $87,000. so most likely you aren't going to have to worry about credit for chinese taxes or other deductions.

Actually, not so simple. It's quite likely that he won't qualify for the foreign income exclusion. He won't meet the bona fide resident test (must be a resident for an entire tax year), and may not meet the physical presence test (330 full days in 12 consecutive months).

Ira
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He's never had to file state income tax forms (income below the minimum), and wouldn't have to file Fed'l either, except the minimum for Sched SE is $400, and his income has been over that.

You'll have to check with your state. Most states will consider that he is still a resident of the state even though he is outside of the country. Most states also do not provide an exclusion for foreign income so he may have to file a state tax return while in China.

Ira
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Per the flowchart on p. 65 of pub 970, it appears that the TEFL training meets the requirements for Qualifying Work-Related Education, and so might be deductible; however:

- DS didn't actually pay it. I paid for it as DH's & my graduation present to DS.
- I plan to claim him as a dependent on DH's & my 2009 returns. He appears to meet the criteria per pub 929, including "...was under age 24 at the end of the year and a student." He will turn 24 in 2010 and was a student Jan thru May of 2009. Since it does not say "...a student at the end of the year...," I don't think his graduation disqualifies him from being declared our dependent for 2009. If I'm misinterpreting this, please let me know.

Question: will either of the above disqualify the TEFL training from being deductible? If so, I won't waste any more time on pub 970, and just focus on pubs 54 and 901.
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