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Question on Foreign Earned Income Exclusion

Question on Foreign Earned Income Exclusion

Old Mar 31st 2009, 4:34 pm
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Default Question on Foreign Earned Income Exclusion

This is our first year filing a US tax return - OH's company have provided accountants to do this for us. We arrived in the US in July 2008. In the UK both of us worked, here in the US only OH has been working.

My understanding (albeit very limited, I admit!), was that it would most likely be more beneficial to us to file as resident aliens (we meet the substantial presence test to allow this) and use the foreign earned income exclusion to take out the income we earned in the UK before moving over.

However, the accountants are telling us that we are unable to use the foreign earned income exclusion. What they are saying is that, in order to qualify for that we would have to be either US citizens or resident DURING the period of time that the income was earned abroad (ie in the UK). They are citing a court case (Turner v US) relating to tax year 1976 to substantiate this.

I've done a bit of searching around and I can't find any specific reference to that case anywhere - all the tax docs I've been able to find quote the same as the IRS website -

http://http://www.irs.gov/businesses...=96822,00.html

To the layperson (me!) reading that, it looks to me like we ought to qualify.

I'm just wondering if anyone else has been told the same thing? Has anyone successfully excluded their UK income in the first year of filing?
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Old Mar 31st 2009, 5:26 pm
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Default Re: Question on Foreign Earned Income Exclusion

Originally Posted by rebs View Post
This is our first year filing a US tax return - OH's company have provided accountants to do this for us. We arrived in the US in July 2008. In the UK both of us worked, here in the US only OH has been working.

My understanding (albeit very limited, I admit!), was that it would most likely be more beneficial to us to file as resident aliens (we meet the substantial presence test to allow this) and use the foreign earned income exclusion to take out the income we earned in the UK before moving over.

However, the accountants are telling us that we are unable to use the foreign earned income exclusion. What they are saying is that, in order to qualify for that we would have to be either US citizens or resident DURING the period of time that the income was earned abroad (ie in the UK). They are citing a court case (Turner v US) relating to tax year 1976 to substantiate this.

I've done a bit of searching around and I can't find any specific reference to that case anywhere - all the tax docs I've been able to find quote the same as the IRS website -

http://http://www.irs.gov/businesses...=96822,00.html

To the layperson (me!) reading that, it looks to me like we ought to qualify.

I'm just wondering if anyone else has been told the same thing? Has anyone successfully excluded their UK income in the first year of filing?
(Bolded) That does sound sensible to me.....if you were not resident at the time of earning - how can you claim the exclusion for residents....

What I did my first year here was not mention my UK income earned that year before becoming permanently resident as it also stands to reason that income before you became resident is not subject to US taxes.
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Old Mar 31st 2009, 5:49 pm
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Default Re: Question on Foreign Earned Income Exclusion

Hey,

I think this popped up in a recent thread a few weeks ago. I am in the same situation but have the solution at least!

If you are married AND you have been in the US less than 183 days in 2008 you can make something called a 'first year choice', meaning you can file as resident alien for last year instead of having to file as a non-resident alien. The benefit of this is that you get the std deductions (10k ish for married couples!) but the downside is that you do need to include your UK income in the form. However, you can exclude up to 87k per person so it doesn't get double taxed. Anything above this and you have to use the foreign tax credits additional form to get back the additional double tax.

In theory, I believe you must be in the US for 183 days this year as well before you can file in this way (file now for an extension), but according to the IRS guy that my accountant talked to, quite often the don't pick up on this. Worst case is that they do and will send you the form back - all you have to do is resubmit it after you've been in here 183 days this year and nothing will change (unless you owe money and then you will have to pay the interest on this).

With the 1040 form you need to submit a letter saying you are taking the first year choice.

Cheers,

Mr C
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Old Mar 31st 2009, 8:04 pm
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Default Re: Question on Foreign Earned Income Exclusion

Originally Posted by mrcarrot View Post
Hey,

I think this popped up in a recent thread a few weeks ago. I am in the same situation but have the solution at least!

If you are married AND you have been in the US less than 183 days in 2008 you can make something called a 'first year choice', meaning you can file as resident alien for last year instead of having to file as a non-resident alien. The benefit of this is that you get the std deductions (10k ish for married couples!) but the downside is that you do need to include your UK income in the form. However, you can exclude up to 87k per person so it doesn't get double taxed. Anything above this and you have to use the foreign tax credits additional form to get back the additional double tax.

In theory, I believe you must be in the US for 183 days this year as well before you can file in this way (file now for an extension), but according to the IRS guy that my accountant talked to, quite often the don't pick up on this. Worst case is that they do and will send you the form back - all you have to do is resubmit it after you've been in here 183 days this year and nothing will change (unless you owe money and then you will have to pay the interest on this).

With the 1040 form you need to submit a letter saying you are taking the first year choice.

Cheers,

Mr C
Thanks Mr C - that was entirely my understanding regarding the first year choice, resident v dual status etc.

However, it's the bit about excluding the first $87k income that the accountant is saying we cannot do - they are citing a court case to support this and saying you can only do this if you are US resident or citizen DURING the period abroad.

What are you planning to do on your return? Have you had advice or are you doing it yourself?
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Old Mar 31st 2009, 8:22 pm
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Default Re: Question on Foreign Earned Income Exclusion

I know I'm sounding a bit negative here, but to receive the foreign earned income exculsion, you have to be resident outside of the US for 330 days or more - so I can't see how you'd qualify.

Read this:

http://taxes.about.com/od/taxhelp/a/ForeignIncome.htm

http://taxes.about.com/od/taxhelp/a/ForeignIncome_2.htm

Last edited by Dan725; Mar 31st 2009 at 8:26 pm.
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Old Mar 31st 2009, 8:26 pm
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Default Re: Question on Foreign Earned Income Exclusion

Originally Posted by Dan725 View Post
I know I'm sounding a bit negative here, but to receive the foreign earned income exculsion, you have to be resident outside of the US for 330 days or more - so I can't see how you'd qualify.

Read this:

http://taxes.about.com/od/taxhelp/a/ForeignIncome.htm

http://taxes.about.com/od/taxhelp/a/ForeignIncome_2.htm
Yeah, you're probably right - I think I'm clutching at straws really based on the criteria on the IRS website.

http://www.irs.gov/businesses/small/...=96822,00.html

I guess I want it both ways - file as resident aliens to get the best allowances AND exclude our UK earnings!!
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Old Mar 31st 2009, 8:34 pm
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Default Re: Question on Foreign Earned Income Exclusion

Yeah.....and the other thing is, "permanent resident" and this "bona-fide physical presence test" are kind of mutually exculsive. If you qualify for the exculsion......I'd be worried about jeopardizing your resident status.

I've had to consider this all once before I got my citizenship (situation never happened) - but I came to the conclusion that it's pretty unworkable due to that - the whole 330 days out in a consecutive 12 month period to qualify for the exclusion is only realistic for US citizens.
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Old Mar 31st 2009, 9:08 pm
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Default Re: Question on Foreign Earned Income Exclusion

Originally Posted by rebs View Post
Thanks Mr C - that was entirely my understanding regarding the first year choice, resident v dual status etc.

However, it's the bit about excluding the first $87k income that the accountant is saying we cannot do - they are citing a court case to support this and saying you can only do this if you are US resident or citizen DURING the period abroad.

What are you planning to do on your return? Have you had advice or are you doing it yourself?
Hi,

I've submitted using the First Year Choice to be taxed as a resident but excluding my foreign income from direct taxing (although including it in the total taxable amount which is used to set the amount of tax I pay on my US salary).

I had a tax attorney do my return in conjunction with consultation with the IRS. Due to the conflicting tax 'guidelines' put out by the IRS on the web, I thought using an attorney would be the best way to go as he both understood the conflicting rules/advice from the IRS and also took pre-advice from them as how to file in this particular case.

Cheers,

Mr C
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Old Apr 1st 2009, 12:00 am
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Default Re: Question on Foreign Earned Income Exclusion

Originally Posted by rebs View Post
However, it's the bit about excluding the first $87k income that the accountant is saying we cannot do - they are citing a court case to support this and saying you can only do this if you are US resident or citizen DURING the period abroad.
Hi rebs, I don't know if you've seen any of my recent posts about this but I've spent a long time studying all the IRS publications relevant to this topic. Unfortunately, I am not an attorney and therefore have not heard of the court case you mention above but I would like to point out that the IRS publication 519, U.S. Tax Guide for Aliens, does not stipulate that you be a US resident or US citizen during the time you earned the foreign income. I have never heard of this and to be honest, it does not really make any sense, unless you are a US citizen living abroad. If you are a US resident during the time you earned the foreign income, surely you would be residing in the US? As you might have already noticed and others have pointed out, there is a lot of conflicting information on the IRS website as well as elsewhere on the web so make sure you get help with your tax return from a qualified person. I'm afraid H&R Block's 'foreign income expert' is not going to cut it as I have found.

You should be able to get the standard deduction only when you file a resident alien return. If you file a dual status return (like I did) you cannot take the standard deduction and you also will not receive the recovery rebate/stimulus payment. Dual status return worked out financially better for us even though we were unable to use the standard deduction so we're glad we were able to take that option.

Good luck with your returns. I posted mine today.

Klara
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