jloto

I've read through the various tax threads but can't find the exact answer I am looking for.

It's our first year in the US after living in the UK so hopefully there are some other first year people are going through the same year.

My wife (USC) and I moved to the US in May 2013 after living in the UK since 2006.

We worked in the UK from Jan to May and paid tax UK as normal. And since moving to the US we have worked in the US and paid US tax as normal.

Trying to do my taxes on turbo tax. When I put in my US portion it shows a refund due of a few hundred dollars. When I add in my foreign income and then exclude it under the bona fide resident test it then shows a few hundred dollars owed.

Anyone know why excluded foreign earned income is changing that amount?

Appreciate any help, I feel like I understand the rules,but not the result!

Jscl

Only shaky knowledge on this, but I think (check!) the exclusion is prorated for the year. I.e. If you're in the UK Jan-Apr (approx third of a year) only a third of the maximum (1/3 of $97,600, ~$32,500 or about £20,000) can be excluded from income. If you earned more than £20,000 while in the UK then some of that income will be taxable. A credit or deduction might end up working better for you.

JAJ

See the IRS page on dual status.
http://www.irs.gov/Individuals/Inter...-Status-Aliens

I'm not sure if TurboTax supports dual status returns. It may be necessary to fill the forms manually, or use a tax preparer. (also not sure if the typical tax preparer in a local store would know about dual status either). You can't file married/joint or head of household if dual status.

Another option is to elect to be U.S. resident for the whole year and file as married/joint, including all foreign income, including amounts from before the time of becoming U.S. resident. The U.S. spouse has to do this anyway, so it can make sense to use this election in first year residence.

jloto

Appreciate both the replies.

I also think the pro rated exclusion comes into play, but when I pro rate it still should work out that I can exclude everything so doesn't explain the change.

As for dual status, it will depend on if the foreign income does have a negative impact. If it doesn't (or has negligible impact) it feels easier to just elect to be resident for the whole year and file jointly.

Tried a couple of local CPAs and they both were not up to speed on the international aspect.

Has anyone used one in Denver/Colorado for this type of thing?

JAJ

So you should consider doing it yourself. It doesn't have to be that complex, and filing U.S. tax is a lifeskill you need to acquire. Use Publication 519, which has a guide for dual status:
http://www.irs.gov/publications/p519/index.html

Your choices look like:

1. Both of you file married/separate (note that your spouse may, in some cases, be able to claim head of household status), with you as dual-status. Your spouse must include worldwide income, as normal, and you would include worldwide income from becoming a U.S. resident (date you arrived with your immigrant visa, normally); or

2. File an election to be treated as U.S. resident for the full year and then file married/joint. Both of you declare worldwide income, with foreign income exclusion/foreign tax credits as applicable. Normally, a non-resident alien spouse (living outside the U.S.) should not make this election but it's different in the first year of U.S. residence. You may or may not be able to use the foreign earned income exclusion (form 2555) but you could get to the same result with the foreign tax credit (1116).

IRS links:

Non-resident spouse treated as resident:
http://www.irs.gov/Individuals/Inter...-as-a-Resident

U.S. Citizens and Residents Abroad - Head of Household.
http://www.irs.gov/Individuals/Inter...d-of-Household

Recommended to calculate your taxes both ways and see which one makes sense. Don't forget information reporting on foreign bank accounts/financial assets (FBAR, form 8938, if applicable). Also consider your state taxes either way. Regardless of choice, you will probably have to file by mail so use certified mail with return receipt, don't use regular mail.

If you need more time, you can file a form 4868 with the IRS to get a no questions asked 6 month extension of time to file your return (you would still need to make an estimated payment of the tax you think is due). And you'd need to check your state rules, some work off the federal extension, some require a separate application.

Jscl

Another possibility for the change is the way the tax on people who exclude income is calculated. You have (or the software has) to use a special worksheet which calculates the tax on all your income (without the exclusion), then subtracts the tax on the excluded income. That gives a different answer to calculating the tax on your income minus the exclusion.

This page shows the calculation:
http://apps.irs.gov/app/vita/content...heet_1040i.pdf

I agree with doing it yourself, if (other than the foreign earned income) your situation is straightforward. My feeling is the way you're doing (treat you as resident) will give you the best results, but it's always worthwhile checking other options.

jloto

I agree, would like to do it ourselves as it isn't too complicated (and we are both accountants!)

That form could well shed some light on the situation. Looks like although the foreign income is not taxed it does contribute to the tax bracket (and therefore could increase the % that the us income is taxed at)

It feels like the change in result is too large to be fully down to this but I need to look at this in more detail to understand it.

Thanks for the tip and I will come back if I have further questions once I've checked this out.

penguinbar

He's not in Denver but Pete Newton has been doing my and several other expats taxes for several years. He's qualified in The US and the UK and I highly recommend him. www.britishexpatstax.com

JAJ

Foreign Earned Income Exclusion (FEIE) works like that. As far as I understand, it excludes certain income from U.S. tax, but income over the exclusion doesn't start at the minimum tax rate but rather at the tax rate that would have applied if FEIE was not claimed.

Not clear why you would be using the FEIE if you are filing taxes as an individual, rather than jointly. If you file individually, you would not include your U.K. salary income unless you received it after becoming tax resident. Although the date of becoming tax resident is not clear based on facts stated. Make sure you understand the difference between foreign earned income exclusion and foreign tax credit.

Dual-status returns can be very complex, especially if there is economic activity in the U.S. before becoming tax resident. However, if it's a simple move, the return doesn't have to be complex. The main restrictions are that you normally have to file married/separate (or qualifying widow/er) and you have to itemize deductions, as far as I understand your spouse must also itemize. Even TurboTax may be able to handle it as long as you force it to show itemized deductions rather than the standard deduction.

jloto

More insight which I appreciate but it still doesn't clear up the most important part that I understand. I have seen that FEI that is not excluded (over the 97k limit) is automatically taxed at higher rate but our earnings in the UK are less than that, even when pro rating for the fact we moved in May.

I may well file separate and exclude my uk earnings but the same issue applies to my USC wife who has UK earnings.

I still haven't fundamentally worked out why in turbo tax when I add in my FEI (that is less than the max amount to exclude) my figure goes from a decent refund to a solid amount owed.

A tax reason or user error?

The jump in tax bracket suggested earlier in the thread might be it and that's what's I am looking at currently.

JAJ

Why are you even including your U.K. earnings, if they relate to a time when you were a non-resident alien? Unless you file married/joint and elect to be resident the whole year, I don't think you need to do this. The FEIE only applies if the earnings have to be included on a tax return in the first place.

Michael

I don't think it works that way. I believe taxes are first calculated on worldwide income and then he'll have to view form 1116 in Turbo Tax to determine how the foreign tax credits are calculated. Form 1116 is very complicated. Since tax is calculated on worldwide income, this may push up the top marginal tax bracket, most of his income will likely be in the top marginal tax bracket, and there is a possibility that all foreign tax credits may not be able to be used.

I think Turbo Tax now correctly calculates dual status returns but only as a resident alien (form 1040) and not as a non resident alien (form 1040NR).

JAJ

OK - it looks there's a lot of confusion between the Foreign Earned Income Exclusion (form 2555), the Foreign Tax Credit (form 1116) and the fact that if someone is dual status, non-U.S. income earned while non-resident doesn't even have to be included on the return.

Jloto: It's recommended to be discerning when using a public forum for tax suggestions.

Michael

As usual, you appear to be right. It appears that Turbo Tax still can't handle dual status tax returns.

jloto

Thanks for all the advice, and yes being discerning is the plan.

I've got everyone a bit off track with the dual status situation. Dual status can fix the issue for me but the issue will still apply to my wife who cannot do dual status.

I put her US income from May onwards into TT - Call it $40k, and TT shows a $2k refund. I then add in her $20k FEI from the UK from Jan to May (under the max to include even if I pro rate
) and TT relcalculates to show around $1k owed.

I'm trying to work out if the above makes sense and why?