Discussion:Foreign earned income - does not qualify for 2555

Client is a US citizen who is a professional athlete. He worked in the US in 2006. In 2007, he played for a professional team in one foreign county for four months, and for a different team in a different foreign country for three months. At the end of the year, he was back in the US, and is working in the US in 2008. Given these facts, he does not meet the bona fide residency test, nor does he meet the physical presence test, so I don't believe his earnings can be reported on form 2555. He received a W-2 equivalent from one of the two countries, which reported his earnings (labeled 'salary') and the 20% that was withheld from his earnings. Neither of the two countries are on the list of countries the US has totalization agreements with (http://www.irs.gov/businesses/small/international/article/0,,id=105254,00.html).

Do I have any alternatives to treating his earnings as self-employment income for US tax purposes?

And the FOCONUS rates for per diem meals.

He does not sound like he meets the tests for self-employment. He has tax withheld, which can be a further sign he is an employee. Read up on the def of an employee, and that will tell you whether or not SE tax needs to be paid.

Find out if the tax withheld can be refunded under a tax treaty or domestic law of the host country. If it's refundable, he'll have to file his foreign tax returns before he can complete his US tax returns, as he can only deduct the LESSER of the tax actually paid or the tax actually due (assuming the cash method). If on the other hand, he owes more as a result of filing the foreign returns, then he can deduct the GREATER of the tax actually due or the tax paid under the accrual method. Very confusing, I know - but I'm half awake on tax day here so I'm not saying it too succinctly.