Foreign unearned income is income you receive that is not for personal services you perform. Common examples include:

• Dividends
• Interest
• Capital gains
• Gambling winnings
• Alimony
• Social Security benefits
• Pensions
• Annuities

Unearned income is not eligible for the Foreign Earned Income Exclusion (FEIE), although it may qualify for the foreign tax credit.

Income That Can Be Earned or Unearned

Some types of income can be partly earned and partly unearned, depending on whether personal services or capital investment are the primary factor. These include income from sole proprietorships, partnerships, corporations, stock options, royalties, rents, and fringe benefits.

Income From a Sole Proprietorship or Partnership

Earned income: If your personal services are an important part of producing the income, the portion representing the value of your services is earned income.

Unearned income: If capital investment is the primary factor in producing the income, the income may be unearned.

Capital is a factor: If capital is important in producing the income, no more than 30% of your share of net profits can be treated as earned income. If there is no net profit, a reasonable allowance for personal services is treated as earned income.

Example 1: You invest in a foreign partnership but perform no services. Your $80,000 share of profits is entirely unearned income.

Example 2: Same facts, but you perform services worth $15,000. Your share of profits is $80,000; 30% is $24,000. Your earned income is limited to the value of your services: $15,000.

Income From a Corporation

Salary from a corporation is earned income only to the extent it represents reasonable compensation for services you perform.

Example 1: You receive a $10,000 “salary” but perform no services. All $10,000 is unearned income.

Example 2: You work full time and receive $100,000. If $80,000 is reasonable compensation, then $80,000 is earned income.

Stock Options

Stock option income may be earned or unearned depending on when the stock was granted, exercised, and sold. Capital gain treatment results in unearned income. If the stock is sold within 2 years of grant or 1 year of exercise, part of the gain may be earned income. Any portion related to foreign services is foreign earned income.

Royalties

Royalties from oil and mineral leases and patents are generally unearned income. Royalties received by a writer are earned income if they are for transferring rights to the writer’s own work or under a contract to write a book or series of articles.

Rental Income

Rental income is generally unearned. If you perform substantial personal services in connection with the rental activity, up to 30% of net rental income may be treated as earned income.

Example: A U.S. citizen operating a rooming house abroad may treat up to 30% of net rental income as earned income if both capital and personal services are required. If only minimal services are performed, all income is unearned.

Use of Employer-Provided Property or Facilities

If your employer provides lodging, meals, or other facilities, the fair market value of those benefits is earned income unless they qualify for exclusion.

Example: You earn $6,000 per month and live rent-free in employer-provided housing worth $3,000 per month. Total earned income = $108,000 ($72,000 salary + $36,000 housing value).

Do Not Include in Foreign Earned Income

• Meals and lodging excluded for the employer’s convenience
• Employer reimbursements (unless they exceed the expense)
• Pension or annuity payments, including Social Security
• Pay received as a U.S. Government employee
• Employer contributions to nonqualified plans
• Recaptured moving expenses
• Payments received after the year following the year services were performed