Questions on Foreign Earned & Unearned Income

[H&V 5]

Hi, I have a couple of questions for anyone who has earned and/or unearned income in a foreign country (in this case the UK) on US taxes. I'm using TurboTax online which I realise may not be the best but I just wanted to see if anyone else is in a similar situation.

1) Once my husband has done all his stuff, I enter my foreign income in 'Miscellaneous Income' and then exempt it again in 'Foreign Earned Income' (both under 'Less Common Income'). For some reason this decreases our return by ~$1000. I was under the impression it should stay the same, as I am just reporting this income and since I paid tax on it already in the UK? Is that correct? If so, then something is going wrong...

2) If I had interest on savings, again which I already pay tax on in the UK, do I have to 'report' that too in the US? Is there an exemption for that?

3) I rent out my old apartment, again, do I just have to 'report' it (as with earned income)? Is there another exemption form I have to fill out?

Any info appreciated, many thanks in advance!

[Nich-Nick 3,354]

I'll add a few comments after your questions.

Hi, I have a couple of questions for anyone who has earned and/or unearned income in a foreign country (in this case the UK) on US taxes. I'm using TurboTax online which I realise may not be the best but I just wanted to see if anyone else is in a similar situation.

1) Once my husband has done all his stuff, I enter my foreign income in 'Miscellaneous Income' and then exempt it again in 'Foreign Earned Income' (both under 'Less Common Income'). For some reason this decreases our return by ~$1000. I was under the impression it should stay the same, as I am just reporting this income and since I paid tax on it already in the UK? Is that correct? If so, then something is going wrong...

It won't necessarily stay the same. Let me start with saying that figuring joint taxes and looking at your bottom line before entering the foreign income and exclusion just sets you up for disappointment. It's looking at your results prematurely, kinda like looking at the results before you enter your withholding or standard deduction or any other part of the whole tax process. Everything has to be entered to really know the final tax. 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/UK 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.

2) If I had interest on savings, again which I already pay tax on in the UK, do I have to 'report' that too in the US? Is there an exemption for that?

If you are filing jointly as a resident alien, yes it's part of your worldwide income.

3) I rent out my old apartment, again, do I just have to 'report' it (as with earned income)? Is there another exemption form I have to fill out?

If you are filing jointly as a resident alien, yes it's part of your worldwide income.

It may be better to file Married Filing Separately. You can do a "Save as" in Turbo tax and save your return under a new name, like "Filing Separately". Then modify that return in the filing status and take out the foreign income and exclusion. Then you have both scenarios to decide which is most to your bottom line advantage.

[Trompe le Monde 1,107]

With regard to question number 2 I would fill out a Foreign Tax Credit for interest you have already paid to the UK government

[Nich-Nick 3,354]

With regard to question number 2 I would fill out a Foreign Tax Credit for interest you have already paid to the UK government

If I read Pub 519 correctly, I don't think you can take a credit for all the taxes, only the unearned income (interest) part, but not the wages or rent. Is that correct Trompe? Am I reading that correctly?

Below is from Pub 519, p. 30, third column.

Resident aliens generally claim tax credits and report tax payments, including withholding, using the same rules that apply to U.S. citizens. The following items are some of the credits you may be able to claim.

Foreign tax credit. You can claim a credit, subject to certain limits, for income tax you paid or accrued to a foreign country on foreign source income.

You cannot claim a credit for taxes paid or accrued on excluded foreign earned income.

To claim a credit for income taxes paid or accrued to a foreign country, you generally will file Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), with your Form 1040.

For more information, get Publication 514, Foreign Tax Credit for Individuals.

[Trompe le Monde 1,107]

I read that as you can't claim tax paid on earned income that would have been excluded from AGI on the 2555, since you aren't liable for US tax on that income.

However, passive income such as interest and capital gains is not excluded from the AGI but would have been taxed by the UK government, so you can claim a credit against that.

That's my understanding of it anyway.

[H&V 5]

It won't necessarily stay the same. Let me start with saying that figuring joint taxes and looking at your bottom line before entering the foreign income and exclusion just sets you up for disappointment. It's looking at your results prematurely, kinda like looking at the results before you enter your withholding or standard deduction or any other part of the whole tax process. Everything has to be entered to really know the final tax. 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/UK 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.

Thank you for the clarification Nich, that actually makes a lot of sense now I think about it like that.

So this is probably a dumb question, but to do Married Filing Separately, do I do a whole other return myself (as in, in TurboTax, do I have to sign up for another account myself?) When we just changed the status to Married Filed Separately, it didn't ask us any different questions, but my husband ended up owing tax instead.

My husband does have some capital gains/dividend income but its really not that much, although perhaps it is affecting it like you say?

I read that as you can't claim tax paid on earned income that would have been excluded from AGI on the 2555, since you aren't liable for US tax on that income.

However, passive income such as interest and capital gains is not excluded from the AGI but would have been taxed by the UK government, so you can claim a credit against that.

That's my understanding of it anyway.

Thank you for your comments, Trompe. I will find that form to fill out for Foreign Tax Credit.

Just to check, the foreign rent is 'unearned' income, correct? But as far as I can tell there is no exclusion or credit for it (as with the wages and interest)? When I put it (and related costs/depreciation etc.) into the 'Rentals and Royalties' part of TurboTax I don't think it changed anything, but there's not another 'hidden' place in TurboTax it should also be going?

Many thanks. Steep learning curve for me here!

[Nich-Nick 3,354]

So this is probably a dumb question, but to do Married Filing Separately, do I do a whole other return myself (as in, in TurboTax, do I have to sign up for another account myself?) When we just changed the status to Married Filed Separately, it didn't ask us any different questions, but my husband ended up owing tax instead.

To change scenarios and try different things, I just "save as" with a new name for the return. Then I don't have to put the basic info in again. But I buy and install the $24 version of Turbo Tax. If you're doing online, I don't really know alot of how it works. I tried it and hated it because it didn't have the flexibility to look at the forms. I've used installed tax software for at least a dozen years now so the online annoyed me a little. I guess because it's "free" they don't give you all the options. It seems like the interview thing can put stuff everywhere if you happened to answer something oddly.

So back to your question of changing filing status. Did you take out the foreign income and exclusion? Is there a way to tell and see the numbers in the online TurboTax? Can you see that the foreign income has been erased? As far as the questions go, they are pretty much the same for all tax returns. Are you married?yes/no. Did you get money from an employer? Y/N. Did you contribute to an IRA? Y/N. I think if you changed filing status then you should go back through all the questions again. And it seems logical to me that he could owe more tax or get less refund by filing married separately.

And my real recommendation is go buy TurboTax Basic and install it.

I can't answer the Rent question because I've never owned rental property or looked it up. I'm only good at taking a stab to help with something I've done and struggled through the learning curve of. Nor can I help with State returns because we don't have a state income tax in Texas, so I'm clueless when people ask me those kinds of questions too.