USC and CR1 first tax return after returning from UK in may - dual status return / 1116 / TaxACT questions

[BrianK 1]

Wife (USC) and I (CR1) moved from the UK to the US in May of this year. She was in the UK from Sept 2012 to May of 2014, other than 10 days in the US in 2013. I was not in the US between June 2012 and May 2014. We both worked in the UK January to April, both worked in the US from June onwards.

Filing Taxes with TaxACT, looking to get everything right as applying for mortgage in her name.

First off, really simple, when declaring UK income/tax, we're looking at amounts without including national insurance, right? Just want to double check.

I've read about waiving the dual status return option and instead filing jointly with her - do I need to declare this specifically, or can I just go ahead and fill out a normal return? Someone suggested to me I/we could still get a prorated exclusion for the amount of time we were in the UK, but I'm not seeing an upside to this other than making things more complicated, is that fair? I imagine the taxes we paid in the UK will be enough that we won't have to pay any more.

From what I understand we then each fill out a 1116 and we're good, yes?

Thanks in advance for any and all help, as ever.

[Nich-Nick 3,354]

Gross income before anything is held out.

You should work the tax returns every way legally possible to see which way comes out best. See if one joint ends up with less taxes than the two separate combined. I suggest doing them all from scratch so you can compare side by side, rather than modifying the same return to try it out. Easy to forget something with modifications.

With a joint return, worldwide income is reported--

Wife UK (gross income)

Husband UK (gross income)

Wife US

Husband US

You can use Form 2555 to exclude the foreign incomes. It is subtracted out on Line 21 of the Form 1040.

Or you can do the foreign tax credit. But it is only taxes paid. National Insurance is not a tax. Pension contributions are not a tax. And if you filed your P85 Forms and got some UK tax back, then factor that in when figuring how much tax you paid to the UK. The foreign tax credit has some complicated rules, so read them carefully. You can't use foreign income exclusion and foreign tax credit both on the same earnings. Pick one or the other.

[BrianK 1]

Thanks Nich-Nick. I've been filling it out for the foreign earned income exclusion, but it's saying "you must qualify under the bona fide residency test or the physical presence test" - is it the physical presence one? I've tried to enter details for Bona Fide but it's a lot more complicated and gives me the impression it's for those still living abroad. Can you help?

[Nich-Nick 3,354]

Yes. For the UK citizen...he qualifies on both. He most likely has been resident in the UK since birth until May 2014. And he has the right to live and work (bonafide resident) in the UK because he is a citizen.

For USC, she must have had something that allowed here to legally live and work in the UK. .. a visa, or something from the Home Office?? That makes her a bonafide resident of the foreign country (UK).

This form is written for many purposes so can be confusing. It basically wants to confirm that you and she had the legal right to be working in the UK and not over as tourists trying to shave a little off your American taxes.

If that doesn't explain enough, ask more.

[Nich-Nick 3,354]

Enter the date that your period of physical presence began and ended.

Began 01/01/2010

Ended 05/07/2014

That's 1587 days of presence

Enter the date that your period of physical presence began and ended.

Began 09/11/2012

Ended 05/07/2014

That's 603 days days of presence

For bonafide you had to spend an entire tax year in that country. It doesn't say it had to be Tax year 2014. How about 2013?

For presence, your count covers a 12 month period that ends in 2014. It doesn't have to all be all in 2014. Is there a 12 month period ending in 2014 where you were present in the UK?

See the flowchart on page 13 of Publication 54 http://www.irs.gov/pub/irs-pdf/p54.pdfwork it out for each of you.

The question asking about notifying the UK 13a means did you not pay UK taxes because you claimed to not be resident to UK tax authorities. No you didn't. You paid taxes.

Will add a separate post on the other question.

[BrianK 1]

Ah ok, I thought it was days of presence within the 2014 tax year.

For bonafide you had to spend an entire tax year in that country. It doesn't say it had to be Tax year 2014. How about 2013?

For presence, your count covers a 12 month period that ends in 2014. It doesn't have to all be all in 2014. Is there a 12 month period ending in 2014 where you were present in the UK?

Yes, perfect, thank you.

See the flowchart on page 13 of Publication 54 http://www.irs.gov/pub/irs-pdf/p54.pdf work it out for each of you.

This confuses me because it asks "Is your tax home in a foreign country?" which currently it isn't, but I guess for the purposes of adding foreign income/tax it was then..?

The question asking about notifying the UK 13a means did you not pay UK taxes because you claimed to not be resident to UK tax authorities. No you didn't. You paid taxes.

Sorry, I'm not sure what this is relating to - 13a?

Edited March 16, 2015 by Penguin_ie

[Nich-Nick 3,354]

The reason I'm questioning it is it's looking to give us back around 96% of the income tax we paid this year in the US, which seems high - combined income of $36k, paid taxes of $3300, saying we'll get $3164 back. This doesn't include medicare or social obviously, though when we added the two jobs in the UK we entered income but also taxes paid in the UK and social security paid - was this wrong? I modified it to exclude the UK taxes and national insurance (just left both at $0), and it came out at a much more realistic $880.

.....Continuation

Not looking at your return makes it impossible to give a good answer. But assuming you each successfully fill out the exclusion---

Line 7 of the tax return will include the total of all of this:

Wife UK (gross income)

Husband UK (gross income)

Wife US income

Husband US income

That is the sum of every penny earned in either country. Many people mistakenly exclude the income but never report it on Line 7 first. So check that. Is ALL income on Line 7?

Line 21 of the 1050 is the sum of:

Wife UK (gross income)

Husband UK (gross income)

Shown as a negative number. It comes from the exclusion calculated on the two forms 2555. Put a minus in front of it.

I don't know how TaxAct shows you the figuring of the tax. It is usually figured in the background but it is not calculated by looking up your Taxable income on the tax Tables. There is a worksheet in the 1040 instructions to follow if you were doing it manually. It goes something like this...

Tax on ALL the income (US and foreign) = X

Tax on only what the foreign alone would generate = Y

X - Y = Z your tax

If you followed that, they figure the tax on all of, then figure the tax on the foreign part. They subtract out the foreign income's part of the tax, leaving you with your final tax bill. So it is not really erasing your foreign income. It is deleting the tax it would have generated if not for the exclusion. That's not a good of a break as erasing it completely, but that's the rules.

[Nich-Nick 3,354]

Answer to your questions while I was typing the US line item info to check,

Tax home was in the UK for the period you want to claim residence in the UK. You paid UK income tax on that money you are wishing to exclude because that was your tax home at the time.

Your tax home changed when you moved to the US. Even if you now had an online job with a UK company for work in the UK, you would no longer pay UK income tax. You pay taxes to the place where you live. That's in the tax treaty.

[BrianK 1]

.....Continuation

Not looking at your return makes it impossible to give a good answer.

They charge to see the final forms filled out. I have to go out for an hour, but when I get back I'll pay them and upload them to imgur (censorted to a point) so we can figure it out.

Thank you so much for your help. You're the reason people come to this site.

[Nich-Nick 3,354]

They charge to see the final forms filled out. I have to go out for an hour, but when I get back I'll pay them and upload them to imgur (censorted to a point) so we can figure it out.

Thank you so much for your help. You're the reason people come to this site.

You ought to see some kind of summary of your wage income to know if you included your foreign with your other W2 wages. Don't they give you at least a summary even without showing the forms?

I have never used TaxAct or anything online. I purchase software and install on my computer because I am constantly checking out the actual forms generated and the real IRS instructions as I go along. Maybe that is because I started filing taxes before tax software was available where you filled out a paper form line by line with a pencil following a paper book of instructions. And when you were satisfied it was correct, you copied it all neatly in ink on the the spare form that was included. I know...the dark ages. But with tax software if you answer a question wrong because you haven't studied the IRS instructions and publications, it could put numbers in wrong places or generate whole forms that don't even apply or skip things that do apply.

[BrianK 1]

They do give a summary, here it is.

http://i.imgur.com/bCrXmxo.jpg

I'm going to pay now and then screenshot the forms so you can take a look. Thank you!

[BrianK 1]

Apologies - I've marked out the names and the number on the second image, hopefully the remainder is acceptable.

http://imgur.com/a/lBNxe