rew1000

Klara: It sounds like you're on the right track with the dual-status returns - both for federal and state. After the effort you've put in to understand the rules, it could be hard to find a tax professional who has a better grasp than you do (at least for a reasonable cost).

dbj1000: Are you sure about the lack of time requirements for foreign-earned income exclusion? Isn't there a requirement for a "bona fide residence" abroad of a complete tax year or "physical presence" abroad of 330 days in a 12 month window?

dbj1000

I stand corrected. I should have looked it up before jumping all over your post!

http://www.irs.gov/businesses/small/...=96817,00.htmlFor a UK person, resident in the US for tax purposes, filing their first year's return in the US I cannot see how they would not meet the criteria above, given that the time requirements abroad do not need to have occurred within one single tax year.

Klara

To rew1000: yes, that's how I'm starting to feel. I have been reading various IRS publications and websites with advice for so long and I have done the calculations about 20 times over now, that I feel like I should become a CPA at the end of it, if only to not waste all the knowledge I've acquired.

Thanks to Elvira for pointing me in the direction of the UK-Yankee site. I spent several hours yesterday reading some questions and answers over there, however, as is often the case, this has raised even more questions for me, for example, regarding the housing exclusion and/or deduction you can claim on form 2555, or the exchange rate you should be using to calculate your foreign earned income.

Someone on the UK-Yankee site posted a link to a paper by an assistant professor of accounting at Montclair University, which examines the differences between the foreign earned income exclusion versus the foreign tax credit and has got good examples of how to account for these. However, it was published in 2007 and it's based on 2007 figures, so may not be completely up to date as far as current laws go. You can find the paper here: http://findarticles.com/p/articles/m...7/ai_n28522856

My plan is to prepare our tax returns for all possible scenarios we can come up with, following the IRS publications and their interpretations. I will let you know if I have come up with any solutions or further questions.

sundiego

Hi, Klara,

I am in a very similar situation as yours. Your post is very informative. Thanks.

One question I have though is that since the residency rules are different between federal and state tax laws. Can I file 1040 (use first-year choice) for federal return, and 540NR for state return?

My foreign income for 2008 is less than $87600, so if federal and state residency status needs to be the same, and I elect to be full-year resident for 2008 in federal return, I would have that foreign income double taxed in state return, because california doesn't recognize foreign income exclution. Obviously, that approach wouldn't make sense to me.

Please share what's your conclusion at the end. Do you file dual status for both federal and state returns?

Klara

Yes, I believe so. I actually used TaxACT to do my returns, and the software generated the federal form 1040 and the California form 540NR. I was prompted to select either the full residency or non/part-year residency for the state return and the 540NR was generated automatically as a result of that selection. My federal return is just the standard form 1040 (even though I'm filing as a dual status alien).

My husband and I have decided to file as dual status resident aliens on the federal return and as part-year residents (married filing separately) on the California return. I am not sure what your marital situation is but on the 540 form it states that the filing status must be the same as on the federal form, i.e. if you're married filing separately on the federal return (which is compulsory if you're filing a dual status return) you must also do so on the state return. However, this may not be applicable to you if you're single.

I have just printed out the state return (best $13.95 ever spent, I think ) and it's fairly straightforward. You just need to transfer the figures from your 1040 and then enter the California additions or subtractions -- this is where you exclude the UK income, i.e. your California taxable income is reduced to just the amount you earned while resident in California. Your tax rate will be based on your total worldwide income but the taxable amount will only be the California portion of your income.

I hope I haven't confused you too much. My husband and I have been working on these tax returns for what seems like forever but we're finally nearing the finish line. It doesn't help that many of the instruction documents found on the IRS site and on the California FTB site appear to contradict each other or are so vague that you just have to hope for the best. Other information you may find through Google only complicates things as everyone's situation is slightly different and people are really only expressing their opinions (just like I am right now) and they're unfortunately not authoritative or definitive.

For the people who are wondering what will happen to their tax return when they move abroad and start earning foreign income in excess of the $87,600 limit: you will be taxed on everything over this limit but you can exclude additional amounts spent on housing expenses. Make sure you keep your rent records, utilities statements etc. as they will come in handy! We never managed to work out how we would have been able to reduce our federal taxable income if we had kept this information and filed a joint return. We lived in the most expensive London borough yet once we moved we threw everything out (nothing like the feeling of freedom from the council taxman!) and therefore had to abandon the idea of the foreign income exclusion. One thing I never worked out is why they penalise couples who earn different amounts of money - one may earn more than the limit of $87,600 and the other may earn less but as far as I can see the exclusion is calculated per person and that's where this whole thing falls apart. Anyway, I think I'm rambling now...

Before I forget, sundiego, enjoy San Diego! It's my second favourite place in America after San Francisco. Please let me know if you need any more details about the tax returns, I'm happy to help. Good luck!

P.S. To anyone who is considering moving to the US: please wait until January, you'll make your first tax return much easier on yourselves!

Michael

After the $87,600 plus housing exclusion you can then use tax credits based on the tax paid in a foreign country. This is a little complicated since you cannot use the taxes paid on the amount on the $87,600 and housing exclusion. However, if the foreign tax rate is higher rate than the US tax rate, normally there wouldn't be any US tax owed.

Klara

Actually, we would still owe tax even after using tax credits, because we could not deduct all of it, even though our UK tax rate was higher than the US tax rate. You're right, it is very complicated and I just can't believe that the taxpayers are expected to do all this tax work themselves (or pay someone to do it for them, with all sorts of disclaimers). I am also dismayed that the US appears to be only country in the world which taxes its residents' worldwide income. Where's the capitalism in that?

Michael

Most of my knowledge is based on Americans transferred overseas during the 1970s so tax policy has probably changed since then.

Did you owe taxes on your earned income or unearned income? Normally credits against unearned income can only be the taxes on the unearned income. Also unearned income can not be excluded from US taxation so therefore unearned income is taxed immediately and the rate is based on your total salary including excluded income.

Most of the Americans that I know that were transferred overseas paid a US equivalent tax on their base salary to the company and the company paid the US and local taxes for the expat on the full salary including housing, expat allowance, cost of listing allowance, etc. but did not include unearned income.

However, once an expat is overseas with a company for seven years, the expat loses his/her expat status with the company and must go on a local salary and pay all his/her taxes owed if he/her wishes to remain overseas. Most Americans then quit filing US tax returns. While overseas, the American is supposed to continue to pay SS and medicare tax but most do not after they lose their company expat status. They do become a little suprised when they start receiving SS benefits since the benefits are greatly reduced since they contributed during so few years. However, they don't seem to have problems getting medicare benefits as long as they paid into medicare for 10 years since the inception in 1965.

sundiego

It's so nice that you could share information with us. I am on the same boat, and never expected it would be so much headache filing the tax return here in US for the first time. I've spent MANY MANY hours doing research on how to file for year 2008, on both Canadian tax, and US tax. It's just too confusing, and even calling IRS doesn't help much.

My wife and I came to US from Canada in July 2008. Ony I have been working. So it will be more beneficial for us if we can file as married jointly. For federal return, we will use the first-year choice to file as full year resident, because that way we will be able to use the standard deduction. We will file an extension by April 15, and file the actual return after 183 days into 2009. And we will use foreign income exclusion on the Canadian source income before I came to US.

For state tax, I think you are right. We will need to file the 540NR. Also like you said, only the US income is taxed, but at the tax rate based on the world wide income. Federal tax rate is done in the same way.

Thanks, Klara. We are enjoying everything here, and almost forgotten the cruel winter back north.