Significance of Income Source Rules in International Tax Law
When dealing with the international transactions, the United States tax law usually divides income into two broad categories: foreign source income and the U.S. source income. The determination of whether the income is foreign or U.S. in origin depends on a set of rules – the source-of-income rules – created by Congress, elaborated by the U.S. Treasury regulations, refined in courts, and further modified by the international treaties. While jurisdictional in nature, the income source rules are fundamentally and critically important to the understanding and operation of international transactions, primarily because these rules generate real operational consequences that affect a variety of substantive U.S. tax provisions. For the purposes of this essay, these consequences may be classified according to the grouping of the affected taxpayers.
Definition of Foreign Earned Income for the purposes of Foreign Income Exclusion under I.R.C. §911
Under I.R.C. §911, if certain conditions are met, a qualified individual can exclude as much $91,400 (for tax year 2009) of foreign earned income from taxable gross income. Two questions arise: what is earned income, and when is such income considered to be foreign earned income?
Understanding Foreign Income Exclusion under I.R.C. §911: General Information
Under I.R.C. §911, a U.S. citizen or resident can elect to exclude as much as $91,400 (for tax year 2009) of foreign earned income and some or all foreign housing costs from taxable gross income if two conditions are met.