Foreign Activities and Taxpayers-US Citizens

[mattw]

The following quote is from the 1997 U.S. Master Tax Guide. Granted it is old, but its the only source I have. Unless the spirit of the Code has changed, perhaps only the percent has changed. Any posters with a more recent issue please contribute.

Pg 549, paragaraph 2405. "Earned Income. The term ""earned income"" means wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered during the period in which the bona fide residence test or physical presence test is met. If a taxpayer is engaged in a trade or business in which both personal services and capital are materaial income-producing factors, a reasonable allowance as compensation for the personal services, not in excess of 30% of his share of the net profits of such trade or business, is considered as earned income (Code Sec. 911(d)(2)(B); Reg 1.9113-3)."

This seems to imply that only 30% of a poker pro's income is taxable while abroad.

Disclaimer: The above is only meant for discussion. Consult a professional for legal/accounting advise.

Discuss.

[TomR]

[ QUOTE ]
This seems to imply that only 30% of a poker pro's income is taxable while abroad.

[/ QUOTE ]
Not even close in my slightly educated opinion.

[Shoe]

It might mean that part of your poker income can be considered "earned income", but i doubt it.

Even if you took it to the extreme and said 30% of your poker income is considered to be earned income, then that would mean that you would have to pay taxes on 70% of your income until that 30% equals 80,000.

[broiler]

You are making a very bad reading of the meaning of earned income. The definition of earned income that you are reading applies only to the income that qualifies for the foreign earned income exclusion. The remaining 70% of your income is still taxable income. For those that have the 2005 Master Tax Guide it is now paragraph 2402 that contains the same paragraph that is referenced.

[mattw]

[ QUOTE ]
You are making a very bad reading of the meaning of earned income. The definition of earned income that you are reading applies only to the income that qualifies for the foreign earned income exclusion. The remaining 70% of your income is still taxable income. For those that have the 2005 Master Tax Guide it is now paragraph 2402 that contains the same paragraph that is referenced.

[/ QUOTE ]

More than a poor reading of the paragraph, it was a very poorly written sentence trying to summarize the meaning. There is discussion regarding moving abroad to get the first $80k of income excluded. However, the exclusion only applies to earned income. The referenced paragraph seems to suggest that since poker involves personal service and capital requirements, 30% may be considered earned income and be allowed to fall into the $80K rule. Yes, the sentence should have read that 70% of the income is taxable, not 30%. When the 30% exceeds $80K, then it becomes taxabel too.

Sorry for the confusion and this is only a laymen's interpretation.