Income Tax Goes Up when Reporting Excluded Income

[fermat 32]

We're really living high on the hog. Is there any deduction for having to buy 5 plane tickets to Europe last year while USCIS processes our case?

I ran your numbers manually (60K + 60K income) and indeed in your case married filing separately is better by about $3000 (assuming foreign income exclusion).

What happens is that your SO's foreign income pushes you into a higher income bracket. With lower income, it would be offset by standard deduction, exemption, making work pay credit and lower tax rate for married folks. But you guys made too much money

[rika60607 215]

I feel your pain. This whole pushing you up into a higher income tax bracket is totally bogus.

IRS calls it "paying at the same rate" as if the foreign income was not excluded, but this kind of calculation actually makes it a higher rate.

This is much like credit card companies choosing to apply your payments to the lower interest debts first.

We're really living high on the hog. Is there any deduction for having to buy 5 plane tickets to Europe last year while USCIS processes our case?

[antoneya 9]

If her income is excluded, just save your self the trouble and enter zero income.

[fermat 32]

Well that would be incorrect and if audited I would likely face penalties.

If her income is excluded, just save your self the trouble and enter zero income.

[fermat 32]

Is that allowed? I somehow doubt you have the option to skip the exclusion if you qualify for it.

I found this on the IRS website: http://www.irs.gov/publications/p514/ar02.html#en_US_publink1000224432

Foreign Earned Income and Housing Exclusions

[/url]You must reduce your foreign taxes available for the credit by the amount of those taxes paid or accrued on income that is excluded from U.S. income under the foreign earned income exclusion or the foreign housing exclusion. See Publication 54 for more information on the foreign earned income and housing exclusions.

You should consider filing jointly with your spouse and instead of taking the Foreign Earned Income exclusion you should take a Foreign Tax Credit and compare it to the numbers that you got by claiming a Foreign Earned Income exclusion.

[CarlosAndSveta 808]

Is that allowed? I somehow doubt you have the option to skip the exclusion if you qualify for it.

I found this on the IRS website: http://www.irs.gov/p...blink1000224432

Foreign Earned Income and Housing Exclusions

You must reduce your foreign taxes available for the credit by the amount of those taxes paid or accrued on income that is excluded from U.S. income under the foreign earned income exclusion or the foreign housing exclusion. See Publication 54 for more information on the foreign earned income and housing exclusions.

You choose the one that gives you the lowest tax liability.

[CarlosAndSveta 808]

I forgot to say that the Foreign Earned Income Exclusion is an election. The IRS can't make you exclude the income. Here is a portion of IRC Section 911 which talks about the exclusion:

Section 911. Citizens or residents of the United States living abroad

(a) Exclusion from gross income

At the election of a qualified individual (made separately with respect to paragraphs (1) and (2)), there shall be excluded from the gross income of such individual, and exempt from taxation under this subtitle, for any taxable year—

(1) the foreign earned income of such individual, and

(2) the housing cost amount of such individual.

[fermat 32]

So it comes down to whether her income tax is higher than ours? That form 1116 is very very tricky. I'm a little hesitant to use it but I will give it a try.

I forgot to say that the Foreign Earned Income Exclusion is an election. The IRS can't make you exclude the income. Here is a portion of IRC Section 911 which talks about the exclusion:

[CarlosAndSveta 808]

So it comes down to whether her income tax is higher than ours? That form 1116 is very very tricky. I'm a little hesitant to use it but I will give it a try.

I think the Foreign Tax Credit rules limit the amount of the credit to the amount of tax you would have paid on that income in the U.S. If the tax rates in Germany are equal to or greater than those in the U.S. then the Foreign Tax Credit might be of benefit to you. If the tax rates in Germany are less then you may be better off excluding the income.

[fermat 32]

Sounds like it would at best break even with respect to the exclusion, especially since they seem to figure the tax on the foreign income part from the bottom with respect to the tax brackets.

I think the Foreign Tax Credit rules limit the amount of the credit to the amount of tax you would have paid on that income in the U.S. If the tax rates in Germany are equal to or greater than those in the U.S. then the Foreign Tax Credit might be of benefit to you. If the tax rates in Germany are less then you may be better off excluding the income.

[fermat 32]

FYI: When I go the route you suggest trying the AMT kicks in and increases my tax $2500 no matter what. Definitely not worth it.

I think the Foreign Tax Credit rules limit the amount of the credit to the amount of tax you would have paid on that income in the U.S. If the tax rates in Germany are equal to or greater than those in the U.S. then the Foreign Tax Credit might be of benefit to you. If the tax rates in Germany are less then you may be better off excluding the income.

[Nich-Nick 3,354]

A few comments to Fermat based on this thread and the other--

You buy and install TurboTax Basic (cheap one) because you don't have to keep fiddling with each scenario. You do it one way and "save as" MarriedJoint for example. Open it and change something and "save as" MarriedSeparate. Now you have two returns to look at. You can save as many versions as you want. Installed is easier to navigate. You can right click items to see where they generated from. You can view a form and edit it. I don't know if online lets you open individual forms or you just wait to the end and print them.

I looked for a post I made a year or two ago, but couldn't find the one I wanted. I found this one.

You can't compare filing jointly without the foreign income. That's not an option if you follow the tax laws. So what you need to look at and compare is:

1.) Filing Jointly with all foreign income included-- Tax = _______

2.) USC filing Married Separately/spouse filing nothing-- Tax = ______

That's your only choices now that you are married, so pick the one that has lower taxes.

So why does the foreign income have an effect on the bottom line of the joint return? If your husband has a Schedule D-Capital Gains and Losses or any qualified dividend income, then his tax isn't figured by simply looking at the tax tables. Post again if he has Capital Gains or dividends and I will explain it more. I don't want to get into it if it doesn't apply to you.

Also the way the tax code figures the tax is not by erasing the foreign income. It figures the tax on the joint income (which may put your return in a higher tax bracket.) Then it figures the tax on the foreign income by itself.

(The final tax = Tax on all income - tax on the foreign part) So your tax is figured with all the income, then they figure how much tax would be on the foreign only and take that off your tax bill....if that makes sense.

I know I explained capital gains to somebody, but I guess it was in a PM. If you have a Schedule D in your return, then your taxes are figured using the Schedule D worksheet. All of your income (yours + foreign) is considered at the top of that worksheet and it trickles down to determine your tax rather than coming from the tax tables. The fact that it starts with ALL the income plays into the bottom line. And then like you've figued out your taxes are a difference in taxation, not merely deducting the whole foreign income.

To compare, you need to do a full clean return of your income Married Filing Separately and do another filing Jointly and adding the wife details and foreign income and exclusion. It's possible you left some bit unchanged (like filing status) when you are fiddling with one return online. Remember not to put single as a comparison.

Here's a walk-through of TurboTax I posted in another thread. It was addressed to the foreigner, so substitute "your" with "wife's" in some cases, ie not dare of your birth, but wife's birth.

Here's how to navigate foreign income in Turbotax.It is found under "Less Common Income." Remember this is also for Americans who worked abroad for an American or foreign company so don't let the multi-use form confuse you.

How was the income reported to you? Statement from foreign employer

Value of employer paid goods...home, car, etc Skip all that

Was _____ a US citizen? No

Was ____ a resident alien while working outside the US? Tick YES, because to the IRS, you are a resident alien for the whole of 2010 because of the statement you wrote electing to be treated that way.

Income tax treaty? YES (you'd have to look that up, but NO won't allow the exclusion)

Ways to qualify for the foreign income exclusion? Bonafide resident

Date started living in foreign country? Probably date of your birth

Date stopped living there? Entry to US date if already here.

Skip everything trying to determine if you get to exclude your foreign home. That's for Americans assigned overseas. The rest is fairly self explanatory. Be sure to enter your foreign address and employer when asked.

Does ___ have an employment contract? NO (for Americans abroad)

Type of visa? Don't tick any of the four. You don't have a visa TO the the foreign country in this question

Does your visa limit the time you can work outside US? Tick nothing or unlimited works.

That should get you through TurboTax. Some questions are self explanatory. Proceed to finish the return and mail it to the place of filing for your location along with the statement you wrote. Make sure line 21 of the 1040 has a negative number showing your foreign income was taken off. Next year with a greencard and no foreign income, it's like any USC couple filing.