Foreign earned income and amounts received after the US entry

[Anna2024]

Hello,

I found a lot of useful information on this forum concerning FEE exclusion. Generally, the income earned before your arrival in the US can be excluded.

And what about your vacation pay? Are we still able to exclude this?

After your arrival in the US, you work 0 hours in Canada and you don't "earn" anything but you continue to receive money from your employer for the services performed during the exclusion period, i.e. your Canadian residency.

I looked more in detail at this concept and found that the law didn't allow to exclude the amounts received after the close of the taxable year and it made me think that the only condition to satisfy for the possible exclusion was: the amounts must be received within the taxable year for the services performed during your Canadian residency and not specifically before your US entry.

Am I absolutely wrong or is it a grey zone?

Here the exact text:

Foreign earned income.
(1) Definition. For purposes of this section --
(A) In general. The term "foreign earned income" with respect to any individual means the amount received by such individual from sources within a foreign country or countries which constitute earned income attributable to services performed by such individual during the period
described in subparagraph (A) or (B) of subsection (d)(1), whichever is applicable.
(B) Certain amounts not included in foreign earned income. The foreign earned income for an individual shall not include amounts --
(i) received as a pension or annuity,
(ii) paid by the United States or an agency thereof to an employee of the United States or an agency thereof,
(iii) included in gross income by reason of section 402(b) (relating to taxability of beneficiary of nonexempt trust) or section 403(c) (relating to taxability of beneficiary under a nonqualified annuity), or
(iv) received after the close of the taxable year following the taxable year in which the services to which the amounts are attributable are performed.

Thank you very much for any clarification,

[nelsona]

Yes, the money paid to you after you move can be included in FEIE, since it is considered foreign source, ie. earned while you were in foreign country. They could still be considered simple foreign income, and you would be allowed to claim any Cdn tax against the US tax that arises from it. This would make it a wash, but you can try it both ways.


The the verbiage described in the text pertains to the following tax year because FEIE is always based on the tax year. It simply means that you would have to wait to claim that income in the following tax year, and it would still be eligible for FEIE in that following year.

[Anna2024]

Thank you very much for clarification.

I'll try both ways to see if there's any difference in numbers - at the federal and the state level - between the excluded foreign income and the credits I would receive for the foreign taxes already paid.

Yes, it makes sense - when you speak about the wording of the text - about the possible FEIE after the closing of the tax year. It would be strange to disallow the amounts received only because the reception date is January 2.

[leopoldpfannerstill]

Anna2024 wrote:
> Thank you very much for clarification.
>
> I'll try both ways to see if there's any difference in numbers - at the
> federal and the state level - between the excluded foreign income and the
> credits I would receive for the foreign taxes already paid.
>
> Yes, it makes sense - when you speak about the wording of the text - about
> the possible FEIE after the closing of the tax year. It would be strange to
> disallow the amounts received only because the reception date is January 2.
Have you used it and have you been successful? I'm also looking into it and don't know where to start.

[Anna2024]

I haven't filed yet as the deadline is still a couple of weeks away. My intention is to proceed with FEIE as it gives me a better refund than foreign tax credits. Even if my tax return is accepted, I won't be able to confirm that this method actually works as not all the tax returns are audited. If I'm audited over this particular item and if I decide to fight IRS and lose, I'll be able to say that yes, my position is erroneous. Until all this happens, you're never 100% sure.

I haven't tried to look for this particular difference between "income earned" and "income received" in any sources. It's just my interpretation.

[nelsona]

Anna, you won't be "audited".

IRS does not notify you if your return is accepted: the simply cash your cheque (if you owe), or issue your refund (if you are owed). There is no notice of assessment issued like in Canada.

In your case, since certain actions need to be taken by IRS on the basis of your return(ie. ITINs) you will get these, without any other information about your return.

[Anna2024]

Thank you, good to know!

I thought that probably in several months from the date of the submission, I would be able at least to check the status of my return where I would read "accepted".

If it doesn't work this way, I would probably be able to use a copy of 1040 and an amount credited by IRS as a proof to show the CRA that my paper copy is my "notice of assessment" for being accepted as a taxpayer by the US for 2023, if they ever question.

[nelsona]

You can get a "transcript" of your return form IRS, usually after you set up an online account with them. Wait a couple of months before requesting.

[Anna2024]

Thank you very much for the information!