[rolling-stone]

Hello,

I'm living overseas and have qualified for the FEIE in 2006, 2007, and so far in 2008.

In Q3 2007 my company's corporate professional services contract was terminated and it contained a severence clause for immediate payment of a severence amount. This was subsequently paid in Q1 2008. My questions are these: Is the severence amount considered earned in 2007 or is it reported as income in 2008? The plan is to use the FEIE and Form 2555 instructions say that income paid in the current year but earned in prior year can be excluded if it could have been excluded in the earlier year. How does this work where income and loss are "pass through" and the company uses cash basis accounting?

Want to keep it neat!

Thanks.

R-S

[AtlantaTaxExpert]

Unless otherwise approved by the IRS, you are a "cash-basis" taxpayer, which means you pay taxes on income RECEIVED in 2007 in 2007, and income received in 2008 is taxed in 2008.

Hence, your severance amount will be taxed in 2008.

[The Texas Tax Expert]

Actually for the foreign earned income exclusion the income is attributed to the year in which services were performed. Depending on how the contract is structured, that might mean the payment was for 2007 or for both 2006 and 2007.

[MukatA]

Yes for 2007, on Form 2555, you will report report the income that you actually received in 2007. Based on the dates you received the wages, you will convert each wage payment to dollar amount using the rate on that date.

You may also have to file form TD F 90-22.1.
If you had any financial interest in, or signature authority or other authority over one or more financial accounts in a foreign country, you may have to complete Treasury Department Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, and file it with the Department of the Treasury. Read: Foreign bank and financial accounts