Form 1116

[ChicagoSarah 127]

Did anyone fill out form 1116 for 2013 taxes? I can't wrap my head around if we should fill it out or not.

We filled out form 2555EZ, but we end up owing money since we had to add the foreign income back in on the 1040 foreign earned income tax worksheet (line 44).

I would think we should qualify for a deduction since my spouse (we married October 2013) paid taxes to the UK January-October 2013 (when he moved to the US). I feel like we're now paying taxes on his income. Should we fill out form 1116 (line 47)? Any help or insight would be greatly appreciated!

[Nich-Nick 3,354]

Did anyone fill out form 1116 for 2013 taxes? I can't wrap my head around if we should fill it out or not.

We filled out form 2555EZ, but we end up owing money since we had to add the foreign income back in on the 1040 foreign earned income tax worksheet (line 44).

I would think we should qualify for a deduction since my spouse (we married October 2013) paid taxes to the UK January-October 2013 (when he moved to the US). I feel like we're now paying taxes on his income. Should we fill out form 1116 (line 47)? Any help or insight would be greatly appreciated!

If you are familiar with the tax worksheet you know that it figures the tax on ALL of the income Then it figures the tax that the excluded foreign would have generated on it's own.

Your final tax = [tax on all] minus [tax on the foreign part]

An example with numbers--

2555 (Foreign Income Exclusion)

Worksheet lines

1. $75000 (taxable income of USC)

2. Foreign excluded $50000 (from Form 2555)

3. $125,000 total of above

4. $23,107 tax on the amount on line 3 (tax on all the income)

5. $6,611 tax on just the Foreign $50k

6. Tax $16,496 (subtract 5 from 4) Married Filing Jointly, Foreign Income

You can't take the foreign tax credit (Form 1116) and the foreign income exclusion both. So figure another return claiming both incomes (US and foreign) but don't do Form 2555 for an exclusion. In the example above, if the Form 1116 gave more than $6,611 Line 5 of the worksheet, then that is the better choice. Pick form 2555 or 1116 based on the lowest bottom line.

You have to know the amount of income tax paid in the UK for only Jan-Oct 2013. Don't include the amount paid toward NHS. UK tax years are different so it wouldn't be an amount on a whole year's salary. Also you have to deduct any refund he got when he filed the P85 with HMRC upon leaving the UK. You can't claim a foreign tax credit on taxes you don't actually owe, even if he hasn't applied for a refund.

Didn't do P85? Info http://search2.hmrc.gov.uk/kb5/hmrc/forms/view.page?record=5Ay4eloD0nw

[ChicagoSarah 127]

Thank you so much! He did the P85, but I believe they didn't issue a refund. I know he has the info, though. We figured his UK tax on a 2013 (not UK tax year basis) based on the currency average for that time period. We have all of the info, but since we used the 2555-EZ, didn't have a place to use it thus far.

Your info is incredibly helpful, and lines up well with what I have figured. I thought we would be issued a refund, but with the tax worksheet figuring tax on ALL income, that eliminates that option.

I'll redo our taxes with the 1116 instead of the 2555 and see how those numbers look to us. I'm not so worried about the small amount they saw we now owe, but want to make sure we're not missing out on a refund we should be getting!

I know i can no longer go this route, but just curious if you think Married Filing Separately would have been of any more benefit in this case?

Thank you for all of your great help!

[Nich-Nick 3,354]

Your info is incredibly helpful, and lines up well with what I have figured. I thought we would be issued a refund, but with the tax worksheet figuring tax on ALL income, that eliminates that option.

But they do discount it by the amount of tax the foreign would generate on it's own.

I know i can no longer go this route, but just curious if you think Married Filing Separately would have been of any more benefit in this case?

You can go that route. File an amended return Form 1040X. If it's less, they send you some $$ back. You would do the same if you decide Foreign Tax Credit is better.

That example I gave is from something I posted for somebody else. Here is the full post which shows you the same incomes figured Jointly and Married Filing Separately, as well as how people often think it works Of course each income situation would alter the taxes so yours will vary but generally Joint is better. (Wife was UK person in this post so switch genders when reading )

US $75,000 taxable income

Foreign $50,000

Example 1--

If you assumed the foreign income was just erased and your tax is based on "Taxable Income" of $75000 Married Filing Jointly

Tax is $10,614

Example 2--

Married Filing Jointly using the Foreign Income Tax Worksheet to calculate the tax because that's the rules if you use Form 2555 (Foreign Income Exclusion)

Worksheet lines

1. $75,000 (taxable income)

2. Foreign excluded $50,000 (from Form 2555)

3. 125,000 total of above

4. $23,107 tax on the amount on line 3

5. $6,611 tax on just the Foreign $50k

6. Tax $16,496 (subtract 5 from 4) Married Filing Jointly, Foreign Income

Example 3--

Married filing Separately

$75,000 taxable income (you calculated as married)

$6100. Add back standard deduction for wife

$3900 add back exemption for wife

Taxable Income is now $85,000 because you aren't filing jointly. The wife is worth $10,000 in reductions. If you file separately to avoid reporting the foreign income, you don't get that perk.

$17, 540 Tax Married Filing Separately (because you want to skip foreign income)

The alternate if he was still single on $85,000 taxable is still over $17,100. So it's not the wife's fault

Example 1 is invalid because of having foreign income. So compare only Example 2 or Example 3.

[ChicagoSarah 127]

Thank you so much! I'll delve into this over the next few nights and try and make better sense of everything.