2010 Tax Return Question, need help :)

[vjam 0]

Hi - just like others on the forum, need some help for my 2010 tax return. I've always done turbotax without problems in the past but this year two big life changes have made it a little bit more tricky.

1) Got Married

2) My spouse moved to the U.S. and entered as a Permanent Resident Alien in October

I was planning on filing jointly married, but where I get tripped up is on the Foreign Income Exlusion, Foreign Income credit parts of the tax return

She earned income in Spain until moving to the U.S. and paid taxes in Spain on this income and earned under the amount to qualify for the exclusion. Until she moved she was not a permanent resident alien in the U.S. She does qualify however for physical presence test (if that even applied) If I use a 12 month rolling period form Oct 2010 - Oct 2009, presence in Spain.

Does this situation imply we would qualify for the exclusion or should we take the foreign tax credit, or do neither apply?

I went to H&R block to ask questions, but they didn't have a foreign tax expert and they were not helpful at all and wanted to charge a lot of money for the service. So i'd love to continue with turbotax if i can steer through these questions

Thank you!

[Nich-Nick 3,354]

If your wife has a greencard and SSN then you can file jointly with no further steps. I only mention that because those without greencards or SSNs are also able to file jointly with some extra paperwork.

She qualifies for the income exclusion based on physical presence. Convert her income to US dollars. It is self reported, as is the conversion rate, but try to be as accurate as possible. You don't document it with paperwork mailed to the IRS, but keep your calculations in your records.

In TurboTax, the foreign income is reported under Less Common Income. It's down at the bottom if you are looking at the page listing all income the topics you might want to go through step-by-step. TurboTax will take you through completion of the Form 2555, which is where the income will be excluded.

I prefer to purchase Turbotax and install it on my computer over dealing with the online version. I have found that TurboTax BASIC ($29.99)does everything I need, even though it keeps suggesting I should pay more and get Premiere. Just click "no thanks." It will handle your foreign stuff, itemized deductions, download many investment company's accounts (like Edward Jones, Fidelity) and do Schedule D things if you have investments. We don't have a state income tax, so you might need a Basic with state version.

One more thing--it will ask about state of residence and if a resident all year. There is a choice in the dropdown of states for "Foreign" to indicate the other "state" where she resided in 2010.

[vjam 0]

If your wife has a greencard and SSN then you can file jointly with no further steps. I only mention that because those without greencards or SSNs are also able to file jointly with some extra paperwork.

She qualifies for the income exclusion based on physical presence. Convert her income to US dollars. It is self reported, as is the conversion rate, but try to be as accurate as possible. You don't document it with paperwork mailed to the IRS, but keep your calculations in your records.

In TurboTax, the foreign income is reported under Less Common Income. It's down at the bottom if you are looking at the page listing all income the topics you might want to go through step-by-step. TurboTax will take you through completion of the Form 2555, which is where the income will be excluded.

I prefer to purchase Turbotax and install it on my computer over dealing with the online version. I have found that TurboTax BASIC ($29.99)does everything I need, even though it keeps suggesting I should pay more and get Premiere. Just click "no thanks." It will handle your foreign stuff, itemized deductions, download many investment company's accounts (like Edward Jones, Fidelity) and do Schedule D things if you have investments. We don't have a state income tax, so you might need a Basic with state version.

One more thing--it will ask about state of residence and if a resident all year. There is a choice in the dropdown of states for "Foreign" to indicate the other "state" where she resided in 2010.

Thank you for your insight. So I understand correctly the physical presence test is a test of a rolling 12 month period right. So it can be lets say Oct 2010 – Oct 2009 and qualifying for 330 Days in country of residence for that period? Is the income that is being excluded the total income earned during that 12 month period or just what was earned in 2010, assume just 2010.

Also – there I believe Is a question if there is a Tax Treaty with Spain. I think there is, but is there a resource to confirm?

Lastly – for the income conversion euro to dollar. Do you just take an average exchange rate for 2010? That part seems less defined and open to interpretation??

THANK YOU!!

[Nich-Nick 3,354]

Thank you for your insight. So I understand correctly the physical presence test is a test of a rolling 12 month period right. So it can be lets say Oct 2010 Oct 2009 and qualifying for 330 Days in country of residence for that period? Is the income that is being excluded the total income earned during that 12 month period or just what was earned in 2010, assume just 2010.

Also there I believe Is a question if there is a Tax Treaty with Spain. I think there is, but is there a resource to confirm?

Lastly for the income conversion euro to dollar. Do you just take an average exchange rate for 2010? That part seems less defined and open to interpretation??

THANK YOU!!

First you have to remember this form is also for Americans who may be working abroad so IRS is trying to cover loopholes of people who want to get out of taxes because they go abroad part-time and do work but mostly maintain their home in the US. There are people that work for oil companies who work 4 weeks in Algeria and spend 4 weeks at home not working. They don't qualify on bonafide residence or physical presence in Algeria to get out of taxes via exclusion.

I think your wife is a bonafide resident of Spain. She's been a resident since birth probably. She has citizenship there, works there, maintains a residence there (or did). Form 2555EZ, 1b: Her residence in Spain began on the day she was born and ends when she got a green card.

The income exclusion: Line 14 will be the number of days she was a resident of Spain in 2010. If it was 356 days, then she would qualify for the full $91,500 exclusion. You figure a percentage of the max based on the number of days. So if it was 250 days, calculate 250/365 = .685. So only 68.5% of that 91,500 can be excluded or ~$62K. If the foreign earnings in US dollars was more than that, you are limited to excluding only $62K. If the earnings fall below the max exclusion, then all are excluded.

This is based on reading and reading every publication and instruction from the IRS that applied when I was doing this in 2008. It's what I did and I haven't heard back from the IRS that they objected.

Conversion: It says the exchange rate when earned. You basically pick it and as long as it's reasonable I think the IRS will buy it. I did a monthly conversion because the rates changed drastically in 2008. If the rate is fairly stable pick an average and just make notes of how you determined your conversion in case you ever had to explain it, which you won't. There are historical exchange rate calculators like http://www.oanda.com/currency/historical-rates/

Tax treaty with Spain - Yes http://www.irs.gov/businesses/international/article/0,,id=169547,00.html

Edit: You asked something about which income is reported/excluded. It is anything earned in calendar year 2010 in Spain.

Edited February 11, 2011 by Nich-Nick

[vjam 0]

First you have to remember this form is also for Americans who may be working abroad so IRS is trying to cover loopholes of people who want to get out of taxes because they go abroad part-time and do work but mostly maintain their home in the US. There are people that work for oil companies who work 4 weeks in Algeria and spend 4 weeks at home not working. They don't qualify on bonafide residence or physical presence in Algeria to get out of taxes via exclusion.

I think your wife is a bonafide resident of Spain. She's been a resident since birth probably. She has citizenship there, works there, maintains a residence there (or did). Form 2555EZ, 1b: Her residence in Spain began on the day she was born and ends when she got a green card.

The income exclusion: Line 14 will be the number of days she was a resident of Spain in 2010. If it was 356 days, then she would qualify for the full $91,500 exclusion. You figure a percentage of the max based on the number of days. So if it was 250 days, calculate 250/365 = .685. So only 68.5% of that 91,500 can be excluded or ~$62K. If the foreign earnings in US dollars was more than that, you are limited to excluding only $62K. If the earnings fall below the max exclusion, then all are excluded.

This is based on reading and reading every publication and instruction from the IRS that applied when I was doing this in 2008. It's what I did and I haven't heard back from the IRS that they objected.

Conversion: It says the exchange rate when earned. You basically pick it and as long as it's reasonable I think the IRS will buy it. I did a monthly conversion because the rates changed drastically in 2008. If the rate is fairly stable pick an average and just make notes of how you determined your conversion in case you ever had to explain it, which you won't. There are historical exchange rate calculators like http://www.oanda.com/currency/historical-rates/

Tax treaty with Spain - Yes http://www.irs.gov/businesses/international/article/0,,id=169547,00.html

Edit: You asked something about which income is reported/excluded. It is anything earned in calendar year 2010 in Spain.

Thank you - that is also very helpful. I agree both by bonafide resident & physical residence she qualifies for the exclusion.

When entering this in turbotax it asks " Was XX a U.S. resident alien while working outside the U.S.?

Yes or No.

She is a green gard holder now but she was working there before her green card arrived. But that shouldn't matter right, since she is a green card holder now right even when she was working in Spain she wasn't yet a resident alien? If I select NO I can not qualify for the exclusion, and just the tax credit. I believe I can have her income excluded still since ultimately she is now a green card holder/permanent resident. Any thoughts?

[Nich-Nick 3,354]

Thank you - that is also very helpful. I agree both by bonafide resident & physical residence she qualifies for the exclusion.

When entering this in turbotax it asks " Was XX a U.S. resident alien while working outside the U.S.?

Yes or No.

She is a green gard holder now but she was working there before her green card arrived. But that shouldn't matter right, since she is a green card holder now right even when she was working in Spain she wasn't yet a resident alien? If I select NO I can not qualify for the exclusion, and just the tax credit. I believe I can have her income excluded still since ultimately she is now a green card holder/permanent resident. Any thoughts?

Then pick YES to that question. And you can write the statement that you and XX want XX to be considered a resident alien for all of 2010 for tax purposes. See Publication 519, page 10, maybe top of last column and it will discuss including the statement, what to write and you both sign it. That's how people who don't have green cards yet get to file jointly...by electing to be treated as a resident alien for tax purposes. Available to those married to US citizens, even if they don't have resident status.