Tax woes!

[Adam M 0]

Hello folks!

I came to the US on 21st June 2006, and worked in the UK up to 20th June 2006.

After getting married and getting the greencard etc, I started a job here in the USA in December 2006.

Questions:

1. Since I've been here more than 6 months, am I right to say that I *have* to file as a resident alien?

2. Should me and the Mrs file jointly or seperately? What are the advantages/disadvantages of both?

3. I believe I have to use form 2555 to report my foreign income. Do I just report for the UK tax year (i.e. from April) or for the whole of 2006? Is it just earnings, or capital gains (i.e. my house sale) too?

4. Are these places like H&R Block etc any use, or am I just as well to file online for free?

Cheers guys!! Happy filing!!

Adz.

xx

[zyggy 9]

Hello folks!

I came to the US on 21st June 2006, and worked in the UK up to 20th June 2006.

After getting married and getting the greencard etc, I started a job here in the USA in December 2006.

Questions:

1. Since I've been here more than 6 months, am I right to say that I *have* to file as a resident alien?

2. Should me and the Mrs file jointly or seperately? What are the advantages/disadvantages of both?

3. I believe I have to use form 2555 to report my foreign income. Do I just report for the UK tax year (i.e. from April) or for the whole of 2006? Is it just earnings, or capital gains (i.e. my house sale) too?

4. Are these places like H&R Block etc any use, or am I just as well to file online for free?

Cheers guys!! Happy filing!!

Adz.

xx

1) It's not six months but 183 days... or if you got your GC in 2006... If those two apply, then yes, you are a resident alien for tax purposes...

2) Never file seperately unless absolutely necessary... there are many significant tax penalties if you file as married filing seperate... I'll go into just a few specifics (lower standard deduction which could push your taxable income into a higher tax bracket, if one spouse itemizes, the other must itemize even though they may have nothing to itemize, loss of many tax credits and deductions, etc.) There are really not that many advantages to filing seperately...

3) You use Form 2555 to exclude any foreign earned income... You use it for the time that you were a non-resident alien. The maximum exclusion for 2006 is $82,400. It is reduced by the ratio of days you were in the UK/365. In you case that would work out to $38,604. If you made more than the exclusion amount, you can take a foreign tax credit paid in the UK against any US taxes you would owe on the income. You use Form 1113 for that...

Capital Gains on the sale of a house is a tough one and would come under the US/UK Tax Treaty...

Refering to the US/UK Tax treaty one find the following provisions:

ARTICLE 13

Gains

1. Gains derived by a resident of a Contracting State that are attributable to the

alienation of real property situated in the other Contracting State may be taxed in that other

State.

Meaning that the UK has the authority to tax you on your gains from your real property.. but the US does as well..

-AND-

ARTICLE 24

Relief from Double Taxation

1. In accordance with the provisions and subject to the limitations of the law of the

United States (as it may be amended from time to time without changing the general principle

hereof), the United States shall allow to a resident or citizen of the United States as a credit

against the United States tax on income

a) the income tax paid or accrued to the United Kingdom by or on behalf of

such citizen or resident; and

B) in the case of a United States company owning at least 10 per cent. of the

voting stock of a company that is a resident of the United Kingdom and from which the

United States company receives dividends, the income tax paid or accrued to the United

Kingdom by or on behalf of the payer with respect to the profits out of which the

dividends are paid.

For the purposes of this paragraph, the taxes referred to in sub-paragraph B) of paragraph 3 and B) in the case of a United States company owning at least 10 per cent. of the

voting stock of a company that is a resident of the United Kingdom and from which the

United States company receives dividends, the income tax paid or accrued to the United

Kingdom by or on behalf of the payer with respect to the profits out of which the

dividends are paid.

For the purposes of this paragraph, the taxes referred to in sub-paragraph B) of paragraph 3 and

in paragraph 4 of Article 2 (Taxes Covered) of this Convention shall be considered income

taxes.

2. For the purposes of applying paragraph 1 of this Article,

a) subject to sub-paragraph B) of this paragraph, an item of gross income, as

determined under the laws of the United States, derived by a resident of the United

States that, under this Convention, may be taxed in the United Kingdom shall be

deemed to be income from sources in the United Kingdom;

B) however, gains derived by an individual while that individual was a resident

of the United States, that are taxed in the United States in accordance with this

Convention, and that may also be taxed in the United Kingdom by reason only of

paragraph 6 of Article 13 (Gains) of this Convention, shall be deemed to be gains from sources in the United States.

So in this case it's saying that the gains are to be treated as if they were created in the US...

-AND-

4. Subject to the provisions of the law of the United Kingdom regarding the allowance

as a credit against United Kingdom tax of tax payable in a territory outside the United Kingdom

(which shall not affect the general principle hereof):

a) United States tax payable under the laws of the United States and in

accordance with this Convention, whether directly or by deduction, on profits, income

or chargeable gains from sources within the United States (excluding, in the case of a

dividend, United States tax in respect of the profits out of which the dividend is paid)

shall be allowed as a credit against any United Kingdom tax computed by reference to

the same profits, income or chargeable gains by reference to which the United States tax

is computed;

So... in effect it's saying that the US has the first dip in payment of taxes on real property and that the excess goes to the UK...

According to the tax treaty, you're definitely a US Resident for the year if you got your GC in 2006... If you didn't, there may be some wiggle room in terms if your gains made in the UK before you became a resident would be taxable in the US...

4) I wouldn't use any H&R Block.. in this case you would need to use their Premium Offices with real CPA's... but I would try to find a tax pro that is experienced in Foriegn Taxation... and those are pretty rare.. I would call the IRS office at the Embassy in London about this.. they're the best source on these issues since they deal with the US/UK Tax Treaty all the time and would know what you need to do with IR to get any credits, etc...

Tel: [44] (207)894-0476

(9 a.m. to Noon. Monday through Friday)

Let us know what you find...

Edited February 13, 2007 by zyggy

[rebeccajo 14]

Zyggy and Adam....

First, I agree with Zyggy. You need to ask a tax accountant or contact the Embassy.

But I'm wondering....you no longer pay capital gains in the US on the sale of your principal dwelling....right? If that's so, is Adam LIKELY to have a problem?

Just really curious. Step in here and box my ears if I'm way wrong.....

[jlivings99 0]

Sale of your principal residence allows the exclusion of up to $250,000 in gain. ($500,000 if married filing joint but only if both husband and wife have lived in residence for at least 2 of the past 5 years) I think this exclusion applies to a principal residence in a foreign location but I would get professional tax advise for this issue.

I am glad my husband's principal residence in the UK was sold in 2006 and he won't be a US resident until 2007.

[Tim and Bethanie 1]

Turbo tax does the foreign income tax exclusion, form 5222 I believe. Worked fine for us, and I directed all questions to the Irs as I went along.

[vvill 0]

Oooh, this is just the thread I need!

Background:

I moved from Australia to the USA in May 2006 and we're going to be filing jointly.

I understand that pre-May 2006 income will be reduced by days/365 * $82,400, that's all well and good as I'm under that.

Question 1:

But what about interest income since then? I have some money in overseas savings accounts that earn income. Not much but I don't wanna get in trouble with the IRS!

Question 2:

How are you all contacting the IRS for questions? Email, phone, in person?

I see they have phone numbers here: http://www.irs.gov/help/article/0,,id=96730,00.html and in person here: http://www.irs.gov/localcontacts/article/0,,id=98342,00.html

Recommendations / caveats with either method?

Thanks!

[Steph1010 1]

I had to reply to this because for some reason I cannot start a new topic. My husband just recently got a new job. He is a tennis teacher and his boss is considering him contract labor. He will be paying him tax free. We are in charge of keeping up and paying the taxes. Do we just keep a record or his income and then file at the end of the year? Do we need to fill out anything? We just dont want his permanant residence status to be affected. Thanks for your help.

[jlivings99 0]

Your husband is considered self-employed. He not only has to pay federal income tax (from 10-35% depending on much income you have ... likely 25% or less) but he also has to pay his own social security and medicare taxes (these are 15.3% of his compensation). He should make quarterly estimated payments on 4/15, 6/15, 9/15 and 1/15. He should receive information on the total amount he is paid for the year from the company that pays him. But it is best to keep track of it yourself. His situation gets complicated very quickly so you might want to consult a tax accountant. There are also specific rules on who has to be treated as an employee versus contract labor ... I hope his new boss is not taking advantage of him ... and possibly creating tax woes for both of you. Many individuals in your husband's situation do not pay their taxes correctly but they are also not dealing with USCIS who might want to see you tax returns.

[zyggy 9]

Just be sure that your wage include the amount that the employer would otherwise be paying for income taxes and social seccurity taxes... If he's paying you the market wage without extra money to pay for all the Self-employment taxes you have to pay, you're being taken advantage of...

Edited February 21, 2007 by zyggy

[vvill 0]

Turbo tax does the foreign income tax exclusion, form 5222 I believe. Worked fine for us, and I directed all questions to the Irs as I went along.

Do you mean 2555?

[vvill 0]

A very quick simple question:

If I am a US resident and I have declared income overseas, do I pay tax on that overseas income?

It is interest income.

[Tim and Bethanie 1]

Turbo tax does the foreign income tax exclusion, form 5222 I believe. Worked fine for us, and I directed all questions to the Irs as I went along.

Do you mean 2555?

A moment of dyslexia! Anyway his foreign income and all the lovely things it entails to file, were done through turbo tax online and we got our return yesterday in the mail.

[Lansbury 19]

Zyggy and Adam....

But I'm wondering....you no longer pay capital gains in the US on the sale of your principal dwelling....right? If that's so, is Adam LIKELY to have a problem?

Just really curious. Step in here and box my ears if I'm way wrong.....

We are in a similar position. Arrived November 2006 and sold out UK house when we left. After much research we decided to see an accountant this year. The one we went to has a resident alien on the payroll as they have some practical knowledge.

Anyway the outcome was no-one knew for sure the answer to the capital gains tax question and they are having to research it to be sure.

The problem we have is we sold our London house for about $380,000 and purchased a much better and bigger property in the USA for $249000. We also sold the London house for 135,000 UK pounds more than we paid for it. So what in fact under the various laws is the capital gains, as far as we could tell it is anything over the purchase price of the US house hence we sought professional advice.

Be interesting to hear from others who have been in this situation.

[vvill 0]

Hello folks!

I came to the US on 21st June 2006, and worked in the UK up to 20th June 2006.

After getting married and getting the greencard etc, I started a job here in the USA in December 2006.

Questions:

1. Since I've been here more than 6 months, am I right to say that I *have* to file as a resident alien?

2. Should me and the Mrs file jointly or seperately? What are the advantages/disadvantages of both?

3. I believe I have to use form 2555 to report my foreign income. Do I just report for the UK tax year (i.e. from April) or for the whole of 2006? Is it just earnings, or capital gains (i.e. my house sale) too?

4. Are these places like H&R Block etc any use, or am I just as well to file online for free?

Cheers guys!! Happy filing!!

Adz.

xx

1) It's not six months but 183 days... or if you got your GC in 2006... If those two apply, then yes, you are a resident alien for tax purposes...

2) Never file seperately unless absolutely necessary... there are many significant tax penalties if you file as married filing seperate... I'll go into just a few specifics (lower standard deduction which could push your taxable income into a higher tax bracket, if one spouse itemizes, the other must itemize even though they may have nothing to itemize, loss of many tax credits and deductions, etc.) There are really not that many advantages to filing seperately...

3) You use Form 2555 to exclude any foreign earned income... You use it for the time that you were a non-resident alien. The maximum exclusion for 2006 is $82,400. It is reduced by the ratio of days you were in the UK/365. In you case that would work out to $38,604. If you made more than the exclusion amount, you can take a foreign tax credit paid in the UK against any US taxes you would owe on the income. You use Form 1113 for that...

I am just a little confused after reading http://www.irs.gov/businesses/small/intern...d=96433,00.html

It says that you cannot file jointly if you are a dual-status alien? The only exception being http://www.irs.gov/businesses/small/intern...d=96370,00.html which says "A declaration that one spouse was a nonresident alien and the other spouse a U.S. citizen or resident alien on the last day of your tax year, and that you choose to be treated as U.S. residents for the entire tax year".

I hate taxes!!

[zyggy 9]

Hello folks!

I came to the US on 21st June 2006, and worked in the UK up to 20th June 2006.

After getting married and getting the greencard etc, I started a job here in the USA in December 2006.

Questions:

1. Since I've been here more than 6 months, am I right to say that I *have* to file as a resident alien?

2. Should me and the Mrs file jointly or seperately? What are the advantages/disadvantages of both?

3. I believe I have to use form 2555 to report my foreign income. Do I just report for the UK tax year (i.e. from April) or for the whole of 2006? Is it just earnings, or capital gains (i.e. my house sale) too?

4. Are these places like H&R Block etc any use, or am I just as well to file online for free?

Cheers guys!! Happy filing!!

Adz.

xx

1) It's not six months but 183 days... or if you got your GC in 2006... If those two apply, then yes, you are a resident alien for tax purposes...

2) Never file seperately unless absolutely necessary... there are many significant tax penalties if you file as married filing seperate... I'll go into just a few specifics (lower standard deduction which could push your taxable income into a higher tax bracket, if one spouse itemizes, the other must itemize even though they may have nothing to itemize, loss of many tax credits and deductions, etc.) There are really not that many advantages to filing seperately...

3) You use Form 2555 to exclude any foreign earned income... You use it for the time that you were a non-resident alien. The maximum exclusion for 2006 is $82,400. It is reduced by the ratio of days you were in the UK/365. In you case that would work out to $38,604. If you made more than the exclusion amount, you can take a foreign tax credit paid in the UK against any US taxes you would owe on the income. You use Form 1113 for that...

I am just a little confused after reading http://www.irs.gov/businesses/small/intern...d=96433,00.html

It says that you cannot file jointly if you are a dual-status alien? The only exception being http://www.irs.gov/businesses/small/intern...d=96370,00.html which says "A declaration that one spouse was a nonresident alien and the other spouse a U.S. citizen or resident alien on the last day of your tax year, and that you choose to be treated as U.S. residents for the entire tax year".

I hate taxes!!

If you were a resident alien in terms of US Tax purposes through the Substantial Presence or Green Card test, you must file a US Income Tax return.

If you are considered a non-resident alien because you did not fulfill the Substantial Presence or Green Card tests, you do not have to file a US Income Tax return. However, your USC spouse does. In this case, the USC spouse has the option to elect to treat you, the non-resident alien as a resident alien and be able to file a MFJ return which typically gives greater tax benefits.

However, if you opt to be treated as resident alien, you must delcare your worldwide income to the IRS as if you were a resident alien. But you do get to exclude up to $82,400 of that foreign source income for the time that you did not reside in the US...

Edited March 1, 2007 by zyggy