Nancy teaches school in a Chinese university.She is a U.S.citizen and has been teaching in China for 5 years.In the current year she will earn $100,000.What are some of Nancy's options for reporting U.S.gross income?
I.She may include the foreign earned income in her gross income,calculate her U.S.income tax,and take a tax credit for foreign taxes paid.
II.She may exclude up to $97,600 in foreign earned income for the current year.
III.She may exclude all of her income because it is earned outside of the U.S.

Question

Quizplus · Accepted Answer

Option I is correct because Nancy can choose to include her foreign earned income in her U.S. gross income, calculate her U.S. income tax, and take a foreign tax credit for taxes paid to China.

Option II is also correct because Nancy may choose to exclude up to $97,600 of her foreign earned income for the current year under the foreign earned income exclusion.

However, Option III is not correct because even though Nancy's income is earned outside the U.S., she is still a U.S. citizen and is subject to U.S. taxes on her worldwide income.

Nancy Teaches School in a Chinese University