Klara

Hi all,

I have a few questions about foreign earned income exclusion as it is my and my husband's first year to file taxes as permanent residents. We arrived in California in July, having been employed and paid taxes in the UK in the first six months of 2008. I have searched for this information throughout the forum and also elsewhere on the internet but the information is either quite old to be trusted or not completely decisive. Having used the TaxACT online software and becoming quite confused by the whole FEI conundrum, we also saw one of H&R Block's foreign earned income experts yesterday and received further conflicting information (which I'm sure will be no surprise to some of you). I will be very grateful to receive any advice from you although I realise you may not be qualified accountants.

Anyway, my questions are following:

1. With regards to the federal tax return, can we exclude all of our income from the UK as long as it is below the $87600 each? I have used the TaxACT software which apportioned the amount according to the number of days we spent in the UK/in the US, which puts us in a difficult position of having to pay some tax twice.

2. Do you know where on the form 1040/2555 I can deduct the taxes paid on the UK income? Can I deduct the whole amount or are there any restrictions?

3. Regarding the California state return, I never expected to pay any taxes on any foreign earned income as we only earned it before we became California residents in July 2008. But the H&R Block accountant told us that California does not recognize any tax treaties with other countries and therefore we have to pay the full tax on our worldwide earnings for the whole of 2008. This MUST surely be wrong! I cannot believe any California residents would be paying state taxes for a period that they weren't actually resident here, e.g. if they moved to another state or another country, or have only been residents here for a part of the year. Please can someone clarify this. It's driving me insane with worry at the moment.

If there is a way to exclude this, do you know where on the state return I can do so? Or am I not legally required to declare foreign earned income on a state return? Perhaps there is a non-residents declaration we need to complete? Any advice will be much appreciated.

Of course, we are more than willing to pay for professional advice but I'm not sure who to trust when a person who is supposedly an expert in foreign earned income and taxes for non-US citizens tells you something that seems completely illogical. Any recommendations for a tax accountant in San Francisco will be much appreciated.

Thank you.

Klara

bippy

Hi Kara,

I've actually been audited on 2005 CA return for not including by worldwide income (I moved to CA from the UK in Sep 05). I thought excluding it was good and proper as I understood that my UK income would be excluded on my federal return.

However, while the franchise tax board does not recognize this exemption at the federal level (I have been arguing with them about this, and it seems their understanding of it is slightly confused) they will only tax the income that you earned will you were living in CA. Declaring your worldwide income on your return for 2008 will determine the rate that you will be taxed, as CA has progressive taxation. So basically, if you earned $100,000 across 2008 but only $50,000 in CA, that $50k will be taxed at the higher rate as though you earned $100k and not the same as someone who earned $50k for the entire year.

Does that make sense? I would recommend having a look here at the Part-Year resident guidelines on the Franchise Tax Board website:

http://www.ftb.ca.gov/forms/2008/08_540nrtoc.shtml

You will need to fill out a 540NR

Klara

I'm disappointed to see that no one has come back with a reply yet, especially as I find it hard to believe that people on this forum have not experienced a similar situation. Perhaps everyone is busy doing their own taxes, or I have been blacklisted for posting here only when I need help.

I guess I'll have to figure it out by myself somehow.

Thanks anyway.

Klara

bippy

I actually posted a lengthy reply but it has not appeared?

Klara

Thanks for taking the time, bippy. Perhaps it's something to do with being a new user? I can see you only have one post so far. Would you be so kind and post your reply again?

Many thanks.

JLC

Hi

I have also just moved to CA and have just started trying to figure out my taxes, so there is a chance I may be incorrect about some of the following...

According to the information on form 540NR (filed by non-residents and part year residents) "California taxes all income received while you resided in California and the income you received from California sources while a nonresident". Seems to me this would exclude income received from a non-CA source whilst not resident in CA? There is a form (Schedule CA (540NR)) that asks you about your total income for the year. It looks like they ask for this information to figure out what proportion of your total income is taxable in CA and therefore what proportion of the standard deduction you are eligible for. Wouldn't be fair to receive the entire deduction if you have only being taxed on a months wages, for example.

Hopefully somebody else will be able to confirm this for you. Double taxes does not sound fun!

J

bippy

Yeah I can't pm you either. I had an account here from a few years back and forgot the details so created a new one to answer your questions.

You need to report your worldwide income for CA tax purposes but you do not owe tax on money that was earned while you are not resident here. Your worldwide income will be used to determine the rate of tax paid on income earned in California.

So if you earned $100,000 across 2008, but only $50,000 in California you will pay the higher tax rate on that $50k (between 6to 9% if married filing jointly) than you would if you you earned $50k across the entire tax year (about 4%)

As JLC said, You need to fill out a 540NR form for 2008 and yo9u should read the information on the Franchise Tax Board website about non- and part-year residents:
http://www.ftb.ca.gov/forms/2008/08_540nrtoc.shtml

bippy

I tried again but I guess my posts are waiting for moderator approval. Can't pm you either. I had an account here from a few years back and forgot the details so created a new one to answer your questions.

I got audited on my 2005 CA return so I know a little about it. Can you pm me your email and I can give you the info I have?

Michael

You probably put a link in your post which is not allowed until you have posted several times (error message is confusing).

bromleygirl

I would be interested to know the answers as well as I shall be moving at the end of June this year to CA so this will impact my 2009 return when the time comes.

I would think though logically CA cannot expect to tax income that was earned before someone became resident?

mrcarrot

Hi Klara,

I am in exactly the same boat as you. I moved over in July and paid tax in the UK until this point as well AND I can't make heads or tails of the US tax system....

I am visiting a tax adviser in San Francisco next week - can't promise that they will shed any light on this but I'll keep you in the know.

Bippy - if you wouldn't mind forwarding me the same info, it would be much appreciated

Thanks,

mr C

Klara

Thanks for all the replies. I apologise in advance for a very long post but this is a very convoluted issue.

What I think I have worked out so far is that you are indeed double-taxed for income over $87,600 on an annual basis (IRS Pub. 54), that is, if you submit a federal resident alien tax return (as opposed to a dual-status alien return), but you can deduct the foreign income taxes paid abroad on the amount over the $87,600 limit. So if you are excluding the whole amount, you cannot deduct any taxes. Any foreign income tax credit goes in line 47 of the form 1040 but you will probably need to submit schedule 1116 to support this tax credit claim.

To avoid paying double tax, you can submit a dual-status alien return where you declare the foreign earned income but do not have to include it in your taxable income (I believe it's done on a separate form 1040NR) and therefore do not have to pay tax on it, but similarly to the California NR return you do have to pay a higher rate of tax as if you did include it, just like JLC said. However, if you are married, you cannot file a joint dual-status return, you have to file separate tax returns (married, filing separately). And, you cannot take the standard deduction, at $10,900 for joint filers, $5450 for single filers. I believe you can deduct certain items but for us, this is a small amount as we can only deduct state taxes (we are not homeowners etc.).

The California tax return is similar for non-residents, in that you have to file form 540 and 540NR to declare your non-resident income but you do not have to pay taxes on this portion. It is only included in your total income to determine the tax rate. On the federal return, you're supposed to write DUAL-STATUS over the top of the 1040 and 1040NR. Not sure yet whether this also applies to the CA return, I haven't yet read the publication in full (FTB Publication 1100).

This is what we have done so far but haven't actually filed yet as I am still looking around for an expert who can support all of this theoretical rambling. My situation is also complicated by the fact that I have self-employed income, so at the moment it looks like I owe money and my husband is due a refund, based on the dual-status separate returns outlined above.

What gets me though, since I find some of the aspects of US taxes utterly illogical, is the people who are either US citizens or permanent residents, who spend their entire year(s) abroad, yet still have to file US tax returns with none of this dual-status nonsense, and they earn more than $87,600 a year. And I'm sure there are plenty of those, especially in London. Do they really pay tax in London (quite a lot of it at the 40% higher rate) and then again in the US for everything they earned over the limit?

My other question is, if you're filing jointly, why can't the foreign-earned income be added together before it is excluded? It seems that each joint filer has to complete a form 2555 separately, which is then transferred over to form 1040. If one of you earns a lot more than the other, the person earning more than $87,600 will not be able to exclude everything whereas the one earning a lot less will not get the full benefit of the exclusion, as only the smaller of the two (the limit or the actual earned income) can be excluded. I must be missing something as I can't imagine Americans letting the IRS get away with this.

Elvira

I am as baffled as you are by all this but, as I'm probably going to be in the US for a while yet, I've never yet mustered enough energy to try and get up to speed with all this.

However, are you familiar with the uk-yankee site? There are a couple of US/UK tax professionals who often answer questions posted in the tax forum.

Please do come back if you manage to find out any more information!

Errol

My understanding is a US Citizen and a US Permanent resident can exlude aprox $87K of worldwide earnings if they live outside the United States for 10 months of the year.

In your case you became a permanent resident half way during the year, so UK income isn't an issue. The foreign tax credit is shown on Form 1040 Line 47
or line 44 for the Form 1040NR It might have to be backed up with Form 1116


THE UK and US Tax Treaty is complex. You need a CPA firm that covers this market. I would be surprised that H & R Block would even have a clue about this extremely complex area of tax law.

There are abundant opportunities for tax savings as well as overpayment. I am looking at this from an outsider, I am sure a tax return signed only by the taxpayer instead of a paid CPA Preparer will invite an audit

Errol

dbj1000

Immigration status and tax status are completely unrelated. You can be resident for tax purposes regardless of whether you're a visa holder, permanent resident of citizen.

Plus, there's no required amount of time out of the country to claim the Foreign Income exclusion.

You're right that it's a complex area of tax law. No use making it even more complex with misinformation.