Income Tax Goes Up when Reporting Excluded Income

[fermat 32]

Here is the situation. Married filing jointly. My US income: $60,000. My wife's foreing income: $60,000. I'm using TurboTax/TaxACT. First I report my US income. The refund shows $4500. Then I enter my wife's income (she passes the Bonafide Residence test, all hers gets excluded), yet my taxes go UP and the software shows I owe $180. I look at the details and my taxable income has not changed because all foreign income is excluded. I don't get why reporting her excluded income changes the bottom line. Maybe somebody can explain it to me like I'm a 5-year-old.

[CarlosAndSveta 808]

Here is the situation. Married filing jointly. My US income: $60,000. My wife's foreing income: $60,000. I'm using TurboTax/TaxACT. First I report my US income. The refund shows $4500. Then I enter my wife's income (she passes the Bonafide Residence test, all hers gets excluded), yet my taxes go UP and the software shows I owe $180. I look at the details and my taxable income has not changed because all foreign income is excluded. I don't get why reporting her excluded income changes the bottom line. Maybe somebody can explain it to me like I'm a 5-year-old.

I don't think you are providing enough information for somebody to be able to figure out what is going on in your case. I thought about replying to this in another thread but realized that the only way to see what is happening is to have all of the data that you are inputting into the tax software.

[Y&E 12]

Are you sure that the US has a double tax agreement with Germany? If not the US may be able to tax Geman income. Does Turbo Tax ask is this income was earned through a domestic or international company? This may make a difference.

[fermat 32]

Can you name a country where you are sure there exists a double tax agreement? Let me know and I will put it into the system and see if anything changes.

Are you sure that the US has a double tax agreement with Germany? If not the US may be able to tax Geman income. Does Turbo Tax ask is this income was earned through a domestic or international company? This may make a difference.

[redsnap 13]

http://www.irs.gov/pub/irs-trty/germany.pdf

It looks like there is an agreement. Maybe you should try paper filing, the programs sometimes don't work under abnormal conditions. (Like filing with an ITIN, I had this experience and we filed the paper forms)

[fermat 32]

I think I got it. The foreign income comes off the BOTTOM of your total income when used to calculate the tax. See page 36 of the 1040 instructions. Basically they had me calculate the tax of the combined foreign plus domestic income (say 100,000) was about $17,500. Then they had me calculate the tax on the $58k foreign income begenning at the lowest bracket. ~$8k. The tax owed is the difference between the two ~$9.5k. Somehow I thought that the foreign income would be deducted from the top and I would pay tax as if I made $42k.

[fermat 32]

Next Question: Is the same nonsense going to happen if I file Married Seperately? I don't see why everybody think its so much better to file jointly if the foreign spouse is working. I assume filing seperately she would be a nonresident and not have any tax liability.

[CarlosAndSveta 808]

Next Question: Is the same nonsense going to happen if I file Married Seperately? I don't see why everybody think its so much better to file jointly if the foreign spouse is working. I assume filing seperately she would be a nonresident and not have any tax liability.

You shouldn't have this problem unless you live in a community property state. Even if you live in community property state the your incomes might not be considered community property since you aren't living together. You are correct that if you file as Married Filing Separately and your incomes are separate property then your spouse will not have to file a return since she is a non-resident alien and did not have any U.S. sourced income.

[Darnell 8,478]

Turbotax has a hotline, can speak to a TaxPro - have you called them ?

[dan_ling 6]

I think you are looking for the 2555 for foreign income exclusion, I used it to exclude my wife's income.

[Darnell 8,478]

I think you are looking for the 2555 for foreign income exclusion, I used it to exclude my wife's income.

Dan - that's the one !

[fermat 32]

I'm using that form. My question was concerning the calculation of taxes when using this form.

I think you are looking for the 2555 for foreign income exclusion, I used it to exclude my wife's income.

[CarlosAndSveta 808]

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.

[fermat 32]

I wish there was an easier way to remove data. Seems like every time I have to start over again or it gets messed up.

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.

[rika60607 215]

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

I'm using that form. My question was concerning the calculation of taxes when using this form.