Area I: Individual Compliance and Planning — CPA Practice Question 04

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Understand the 'stacking rule' for the Foreign Earned Income Exclusion. The excluded income pushes the remaining taxable income into higher tax brackets.

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C.Electing the exclusion may result in a higher marginal tax rate on the non-excluded income due to the stacking rule.✓ Correct

Under IRC §911, the Foreign Earned Income Exclusion is elective. If elected, the 'stacking rule' applies, meaning the tax on the non-excluded income ($140,000 - $126,500 = $13,500) is calculated using the tax rates that would have applied to that income had the exclusion not been taken (i.e., the rates applicable to income between $126,500 and $140,000). Also, no Foreign Tax Credit is allowed for taxes allocable to excluded income (IRC §911(d)(6)).

Common mistakes

Assuming the remaining income is taxed at the lowest bracket rates or thinking the Foreign Tax Credit applies to the full income.

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Common mistakes

Practice the full CPA TCP Practice Exam 3

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