Skip to main content

Earned Income Credit for Foreign Missionaries

Question:

A missionary couple (and their children) lives overseas for over half the year, while maintaining a home in the U.S.  Both are US citizens.  Do they qualify for the Earned Income Credit?

Answer: 

First, there are three potential credits that could be affected by residency status.
  • Earned Income Credit (EIC) (refundable) - See IRS Publication 596
  • Child Tax Credit (non-refundable) - Up to $1,000 per qualifying child
  • Additional Child Tax Credit (refundable) - This credit is for certain individuals who get less than the full amount of the child tax credit.
If the taxpayer did not live with his child in the United States for at least six months of the tax year, he cannot claim the EIC.

But a taxpayer may be able to claim the Child Tax Credit or the Additional Child Tax Credit even though he did not live in the United States at least six months of the current tax year.

It is often advantageous for a foreign missionary to claim a Foreign Earned Income Exclusion using Form 2555, thereby excluding some or all of his earned income from taxation. IRS Publication 596 and Publication 972 state that the Additional Child Tax Credit cannot be claimed if one files Form 2555 or Form 2555-EZ. 

For a missionary paying foreign taxes in a foreign country, he may reduce or eliminate his income tax by claiming the Foreign Tax Credit instead of the Foreign Earned Income Exclusion. With the combination of a minister's housing allowance, education credits, and the Form 1116 Foreign Tax Credit, a missionary may qualify for the Additional Child Tax Credit and be able to reduce or eliminate his income tax.



Comments

Popular posts from this blog

Housing Allowance and Form 1099-MISC Reporting

Question:

A church provides its minister a housing allowance, but for other purposes it believes that it must report the full amount of compensation (including the non-taxable housing allowance portion) on Form 1099-MISC (in order to demonstrate the full earnings of the minister). If the church reports his compensation,including the housing allowance, on Form 1099-MISC as taxable income, will he be able to deduct his housing expenses somewhere else on the Form 1040?

Answer:

This questions brings up a couple of issues. First, most ministers are properly classified as employees who receive Form W-2, not as independent contractors who receive Form 1099-MISC. On Form W-2, Box 1 for taxable compensation is reduced reflecting the church's designation of a portion of his pay as non-taxable. Then in Box 14, it typically reports as a memorandum item his additional non-taxable, housing allowance compensation. In the situation addressed in the question, this Form W-2 reporting may or may not a…

Review: Form 1099 Payments to 501(c)(3) Organizations

Question:

A church rented space from another church last year. Should it request a completed Form W-9 and issue Form 1099-MISC?

Answer:

We have written similar blog posts on this topic in the past (listed below), but we figured it was a good time for a review. 

Payments from one 501(c)(3) organization to another 501(c)(3) organization are not subject to Form 1099-MISC reporting. The 2015 Instructions for Form 1099-MISC state that "payments to a tax-exempt organization" are exempt from reporting a Form 1099-MISC. 

The following are typical examples of payments of $600 or more by a church which are subject to reporting a Form 1099-MISC:
Rent paid to an individual (non-corporation)Payments for services rendered by individuals who are not employees (e.g. janitorial service, facilities, snow removal, guest speakers)Support sent directly to missionariesHere are some similar blog posts that we have written in the past:

Form 1099 for Payments to Other Ministries
Form 1099 for Non-profit?
Fo…

Gifts Paid Out of Church Funds: Form 1099-MISC Requirements

Question:
 A church gave a wedding gift of $1000 to a couple who are church members. No goods or services were provided by the couple in exchange for the gift.  Is a Form 1099-MISC required? 
Answer: In the following answer, we assume that the couple are not employees of the church from whom the gift could not be viewed as compensation for their services. Also, the amount seems to be small enough to avoid any concerns of "private inurement."

Accordingly, no Form 1099-MISC is required. According to the 2017 IRS Instructions for Form 1099-MISC a Form 1099-MISC is only required for payment of goods or services. The requirements are as follows:
"File Form 1099-MISC, Miscellaneous Income, for each person to whom you have paid during the year:  At least $10 in royalties (see the instructions for box 2) or broker payments in lieu of dividends or tax-exempt interest (see the instructions for box 8);  At least $600 in:  1. Rents (box 1);  2. Services performed by someone who is not your …