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TCP CPA Practice Questions: The Foreign-Earned Income Exclusion
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May 14, 2024
In this video, we walk through 5 TCP CPA exam practice questions teaching about foreign-earned income exclusion. Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/tcp-cpa-practice-questions-explained-calculating-the-foreign-earned-income-exclusion/ See the other TCP walkthrough videos here: https://www.superfastcpa.com/free-tcp-cpa-practice-question-walkthroughs/ 00:00 Intro 00:52 Question 1: How to Pro-Rate the Foreign Income Exclusion 02:35 Question 2: Learning Who Qualified for the Exclusion 04:43 Question 3: Calculating Foreign Income Recognized in Gross Income 06:16 Question 4: How to Treat Unearned Income 08:16 Question 5: Putting It All Together 09:43 Pillar Topics
View Video Transcript
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Welcome to another TCP walkthrough video. I'm Logan, and in today's video, we're going to be
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going over the foreign income exclusion, and we're going to be doing that the SuperfastCPA way
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which is diving straight into the questions to learn the material. If you don't know much about
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our strategies and you want to learn more, make sure you go check out our free training webinar
0:18
on superfastcpa.com. It's only one hour long, and we teach the key ingredients to passing the CPA
0:24
exam. Again, it's one hour long, it's free, and it will save you so much time struggling
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with your process. Definitely go check it out. The link will be in the description
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Also, one more thing about this video, we will only be going over five questions in this video
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but members of SuperfastCPA will have access to the full 10 question video when we post it in the
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members forum. So if you like this, there's more of it if you become a SuperfastCPA member. With
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that said, let's go ahead and dive straight into the questions. Okay, here is question one. Maria
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is a US citizen who was a resident of Japan for 250 days during the current year. Maria was paid
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$180,000 for services rendered this year. Assume the foreign earned income exclusion for the year
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is $105,000. How much of the foreign earned income must Maria recognize in her gross income? All
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right, we don't really know much about this. With just a quick glance, you might assume that the
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foreign earned income exclusion is $105,000, so we subtract that from her $180,000 just at a quick
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glance. But you'd be wrong, so let's go ahead and look at the answer to learn how this works
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Okay, the answer is $108,082. So let's learn how this works. Maria's foreign earned income
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exclusion is prorated based on the number of days she spent in Japan. Okay, to calculate that
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we take the $105,000 exclusion, multiply it by the number of days she was in Japan out of the year
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so 250 days divided by the full 365 days in a year, and that gives you $71,918 of the exclusion
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that is prorated or, you know, that you can actually take. So you subtract that prorated
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exclusion from her $180,000 she earned in Japan, and that gives you $108,082. Okay, so this is just
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a small intro into it. There's definitely more that we need to learn, but we at least know that
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if they live in a foreign country for some amount of time during the year, and they make money in
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that foreign country, but they are a U.S. citizen, then we need to prorate the exclusion based on
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how many days they were in the foreign country, and then that can be subtracted from the foreign
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earned income. But again, we need to learn more, so let's go ahead and go to the next question
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All right, here's question two. Assume the foreign earned income exclusion for the year is $108,000
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Which of the following U.S. taxpayers would be allowed a full foreign earned income exclusion
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Okay, again, there's obviously rules that we don't really know at this point. What qualifies somebody
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for the full foreign earned income exclusion? Because up above, we didn't see her take the full
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exclusion. So let's go ahead and look at the answer to start getting a better understanding
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of how this works. Okay, so apparently Liu, who lived in South Korea, is the only one who can
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take the full exclusion. So why is that? Let's read about it. To qualify for the full foreign
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earned income exclusion, the taxpayer needs to meet the physical presence test of being in a
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foreign country for at least 330 full days within a consecutive 12-month period. Okay, so apparently
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the physical presence test is how you qualify for the full foreign income exclusion. And so you have
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to be there at least 330 days during a consecutive 12-month period. So since he was there for 355
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days, he qualifies and so he can take the full exclusion. Mark, even though he was there the
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whole year, did not qualify because he earned income in the U.S., not in India. So that's
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another important distinction. The foreign earned income exclusion is specifically for foreign earned
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income. So it's not for people who work remotely for a U.S. company, but they live in Italy or
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whatever. It's for somebody who lives in a foreign country. They are a U.S. citizen, but they live
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in a foreign country and they earn money in that foreign country. But because they're a U.S. citizen
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any income they earn is going to be taxed by the U.S. system. But to avoid double taxation because
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they're going to be taxed in the foreign country as well, that is where this exclusion comes in
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And it looks like Elena and Sophia also did not qualify because they were underneath the 330-day
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requirement. Now, they would have qualified for a similar pro-rated exclusion like we saw above
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but this question was asking specifically the full foreign earned income exclusion
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All right, so we learned a lot more about it there. It makes a lot more sense now
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Let's go ahead and go to the next question to see what else we can learn. Okay, here is question
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three. Linda is a U.S. citizen who has been a resident of Italy for the entire tax year. Hey
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I was just talking about Italy. She earned $200,000 from her consulting services performed
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entirely in Italy this year. Assume the foreign earned income exclusion for the year is $112,000
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How much of the foreign earned income does Linda need to recognize in her gross income? Okay
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we've learned a lot up to this point. I bet you could take a second and figure this out. Pause
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the video. When you're ready, come back and we will look at the answer to see if you got the right answer. Okay, and the answer is that she has to recognize $88,000 of that foreign income
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in her U.S. gross income. So let's read a little bit about it. She qualifies for the foreign earned
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income exclusion because she has been made a resident of a foreign country, Italy, for the
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entire year, meaning the bona fide residence test. Okay, so that is actually different than the
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physical presence test. The physical presence test was just 330 days throughout the 12 months
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of the year. But bona fide residence test seems like it's you live there the whole tax year and
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you are like an actual resident. You're not just kind of transient. You are almost like a citizen
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not necessarily, but that's kind of the way I'm looking at it. So she meets the bona fide residence
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test instead of the physical presence test. And because she meets that test, she takes the full
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amount of the exclusion. So she subtracts $112,000 from the $200,000 of foreign earned income
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and that gives her $88,000 that has to be taxed in the U.S. tax system now. All right, we've
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learned a lot. Let's go to the next question. Okay, here's question four. Emily, a U.S. citizen
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moved to Singapore on January 11 of the current year to work as a software developer for a
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multinational company. She earned $140,000 in salary and $30,000 from U.S. stock dividends
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during the tax year. Emily has been a resident of Singapore for the entire year after her arrival
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and the foreign earned income exclusion for the year is $105,000. What is her U.S. gross income
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for the year? Okay, first off, is she going to qualify for the physical presence test or the
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bona fide residence test? We're not sure, but if she does qualify, then we need to figure out what
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is her U.S. gross income for the year. So go ahead, pause the video. When you're ready, come back
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and we will look at the answer together. Okay, and the answer was $65,000. Okay, that's significantly
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less than her $140,000 and $30,000. So let's go ahead and look at the calculation. So Emily meets
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the physical presence test and therefore qualifies for the foreign income exclusion
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So she didn't meet the bona fide residence test, and again, that has to be the entire tax year. And
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for the physical presence test, she was definitely there more than 330 days. You just take the 365
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less the 10 days before she lived there, because she lived there on January 11. And then, so you
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subtract the 10 days that she wasn't there, and that's 355 days that she lived in Singapore
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So she qualifies for the full exclusion of $105,000. So that leaves $35,000 of her salary
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that is now going to be taxed in the U.S. And then there's this dividend income. The $30,000 earned
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from U.S. stock dividends does not qualify for the foreign earned income exclusion as it is
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under an income in the United States. Okay, again, this is something you need to pay attention to
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Any income that is not foreign earned is not counted in the foreign earned income exclusion
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So these dividends that were from the U.S., they are not included in this exclusion. So you take
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the dividends and the excess salary that was above the exclusion, and that will be included in her
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U.S. gross income to be taxed this year. Okay, let's go to the next question. All right, here's
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question five. Thomas, a U.S. citizen, worked in Germany from May 1st to December 31st of the
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current year, totaling 245 days. During this period, he earned $95,000 in salary. Additionally
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Thomas received $20,000 in rental income from properties located in the U.S. The maximum foreign
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earned income exclusion for the year is $112,000. How much of his income is subject to U.S. tax
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after applying the prorated exclusion? Okay, this is the final question of the video. You've learned
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everything you need to know, so go ahead, pause the video, see if you can get the correct answer
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and when you're ready, come back. We'll look at the answer together. Okay, and the answer is that
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he would have included $39,822. So let's read through this. So he didn't meet the full physical
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presence test, and obviously not the bona fide residence test. So therefore, the exclusion is
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prorated for him, and so you take that prorated amount here, 245 days divided by 365, multiply
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that by the exclusion, and that gives you the amount of exclusion that he can take. So you
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subtract that from his $95,000 of salary, giving you $19,822, and then you add the $20,000 of
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rental income, because again, that is not foreign earned income, so it doesn't count for the
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exclusion. You add those two together, and that gives you the amount of gross income that will
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be taxed in the U.S. this year for him. All right, we have learned a ton from just five questions
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Before we go any further, let's go ahead and do one more part of the process, which is called
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pillar topics. Now, the idea behind pillar topics in the Superfast CPA Strategy is, as you're going
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through questions to learn the material, you will notice topics and concepts that keep popping up
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You've seen them in like three, four, five questions, and they are obviously important
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according to your review course, because you keep seeing them. So you write those down so you can
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remember them for later and know what is most important from what you just studied. So let's
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go ahead and look at the pillar topics for this topic. All right, here are the pillar topics
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So there are two main ways to qualify for the foreign income exclusion as far as the CPA exam
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goes. I believe there is one other way you can qualify for it, but this is all we're focusing on
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There's the physical presence test or the bona fide residence test. Basically, the physical
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presence test is that they have to have lived in the foreign country for 330 days during 12
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consecutive months. The days don't have to be consecutive, though, so the bona fide residence
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test is more about being there the entire taxable year. There's a little bit more to the bona fide
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residence test, but you don't need to focus on it too much. Just know that they need to be there
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the full tax year to qualify for the bona fide residence test. But if they meet either of these
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tests, then they can qualify for the full foreign income tax exclusion. And this exclusion allows
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the taxpayer to exclude foreign earned income from their U.S. taxable income. If the U.S. taxpayer did
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not meet either test, so obviously the bona fide residence test, they didn't live there the whole
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year, and then the physical presence test, they didn't live there for 330 days or more, then they
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have to prorate the exclusion, allowing them to take a portion of it instead of the full exclusion
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Now, one reminder, this only applies to foreign earned income. So if you live in a foreign country
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but earn income from the U.S., like working remotely and getting a salary from the U.S. or dividends
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interest, rent, etc., this is not included in the exclusion. It is for foreign earned income only. So
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don't forget that. Don't get tricked by that. All right, those are the pillar topics, and that is
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the end of this video. One more reminder to go check out our free training webinar on superfastcpa.com
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We teach the key ingredients to passing the CPA exam. Again, it's only one hour. It's free. Go
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check it out. And if you like this video, just remember that we only did five questions in this
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video, whereas members will have access to the full 10-question video when we post it in the
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members forum. So if you liked this, you can get more of it by becoming a Superfast CPA member
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Make sure to like the video and leave a comment. I hope this was helpful, and I will see you in
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the next video
#Tax Preparation & Planning