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    srivatsann's Avatar
    srivatsann Posts: 32, Reputation: 1
    Junior Member
    		  
    #1

    Sep 23, 2014, 02:00 AM
    Capital Gains Rate for return with Foreign Earned Income
    Hi,

    I am wondering whether Foreign Earned Income will be considered when figuring out the long term capital gains tax rate.

    For example,

    US Income : 40000
    Foreign Income: 80000

    After foreign earned income exclusion and standard deduction/exemptions, the taxable income is (120000 - 80000 - 12200 - 3*3900) = 16100. This taxable income of 16100 is in the 10% bracket.

    However, when calculating tax, it is done as below:

    Tax for total income (120000 - 12200 - 3*3900) = A
    Tax for foreign income (80000) = B
    Total tax is A - B. Essentially, the total income affects the tax rate (here 25%).

    For Long Term capital Gains, does IRS consider only the taxable income (16100 i.e. 10% tax bracket) or does it include the foreign income in figuring out the capital gains tax rate (96100 as taxable income i.e, consider that it is 25% bracket).

    Regards,
    AtlantaTaxExpert's Avatar
    AtlantaTaxExpert Posts: 21,836, Reputation: 846
    Senior Tax Expert
    		  
    #2

    Sep 23, 2014, 06:00 AM
    Since you refer to capital gains, the $80,000 is clear NOT earned income. It bis investment capital which CANNOT be excluded under Form 2555.

    That being the case, ALL of the income is subject to U.S. income taxes, since, under U.S. tax law, ALL world-wide income of a U.S. citizen or resident is subject to U.S. taxes. How much is taxed depends on whether the $80,000 is all capital gain, whether it is long-term or short-term, and on your overall tax bracket.

    Assuming the foreign capital gain is subject to some type of taxation in the host country, you would use Form 1116 to claim a tax credit for that host country tax.
    srivatsann's Avatar
    srivatsann Posts: 32, Reputation: 1
    Junior Member
    		  
    #3

    Sep 24, 2014, 11:15 AM
    Sorry, I was not clear in my earlier message. 80000 Foreign income is from salary (and NOT capital gains). The US Income of 40000 is long term capital gain coming out of US stock sale.

    Regards
    AtlantaTaxExpert's Avatar
    AtlantaTaxExpert Posts: 21,836, Reputation: 846
    Senior Tax Expert
    		  
    #4

    Sep 24, 2014, 11:41 AM
    Ok, then the $80K is excluded using Form 2555.

    The long-term gains is probably taxed at 5%, but certainly no more than 15%. The long-term capital gains rate is dictated by the overall income of the taxpayer.
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