Question

A U.S. citizen worked in a foreign country for the period July 1, 2013 through August 1, 2014. Her salary was

$10,000 per month. Also, in 2013 she received $5,000 in dividends from foreign corporations (not qualified dividends). No dividends were received in 2014. Which of the following is correct?
a. The taxpayer cannot exclude any of the income because she was not present in the foreign country more than 330 days in either 2013 or 2014.
b. The taxpayer can exclude a portion of the salary from U.S. gross income in 2013 and 2014, and all of the dividend income.
c. The taxpayer can exclude from U.S. gross income $60,000 salary in 2013, but in 2014 the taxpayer will exceed the twelve month limitation and, therefore, all of the 2014compensation must be included in gross income. All of the dividends must be included in 2013 gross income.
d. The taxpayer must include the dividend income of $5,000 in 2013gross income, but the taxpayer can exclude a portion of the compensation income from U.S. gross income in 2013 and 2014.
e. None of these.

Answer 1

The correct answer is that the taxpayer must include the $5,000 in dividend income in her 2013 U.S. gross income, but can exclude a portion of her salary for the years 2013 and 2014 due to the Foreign Earned Income Exclusion.

Step-by-step explanation:

The correct answer is d. The taxpayer must include the dividend income of $5,000 in 2013 gross income, but the taxpayer can exclude a portion of the compensation income from U.S. gross income in 2013 and 2014. Under the Foreign Earned Income Exclusion, a U.S. citizen who lives and works abroad for at least 330 full days in any consecutive 12-month period may qualify to exclude part or all of their foreign earnings from U.S. income tax. However, the exclusion only applies to earned income such as wages, not to unearned income such as dividends from foreign corporations. In the given scenario, the individual has worked from July 1, 2013, to August 1, 2014, which is more than 330 days, and thus, a portion of their earnings may qualify for the exclusion in both years. Nonetheless, the dividend income is considered unearned and must be included in the taxpayer's gross income for 2013.