Taxes - Brain...can't....take....any.....mo..............

[Linda&Dave 0]

Ok, came to the US in June of 2005 and so meet the substantive residency test so am classed as a Resident. I worked in the UK until just before I left so have UK income to include in my 2005 tax calculations.

However,

I am really confused between: A: Taking tax paid as a credit (via form 1116) and B: taking tax paid as a deduction on form 1040. What is the difference to me?

Some people write that a person like myself can claim tax exemption for foreign taxes paid but I get the impression that is only if you actually lived abroad (outside the US) for more than 330 days of the tax year.

Someone else formulated that if you paid X amount of tax on UK earnings then your tax liability (or refund) depends on whether you would have paid more or less tax in the US on that same income - does that sound right?

Therefore, it would make sense it seems to me to declare my foreign income as my tax rate in the UK would likely have been more than the US tax rate so I would get a refund - is this true or am I dreaming? In that case, would form 1116 be the right way to go........and would that get filed along with form 1040 (Married, filing joint)?

Sorry for all the questions but I am finding it difficult to nail down just exactly what the best thing to do is for foreign earnings (and pre-paid tax).

Thanks for your advice.

Dave

Edited January 31, 2006 by Linda&Dave

[Widge 0]

Here's what we/I did last year I had arrived as K-1 Sept 04 and we had married Oct 2005

We filed as married filing jointly (1040)

on the Income Section you add your UK Income to your husbands at Line 7 and then at line 21 subtract it (put just your income in brackets i.e. a negative) complete Form 2555-EZ and type this on the 1040 at line 21

A note on calculating your UK Income.

(i) it must be all income from Jan 1st onwards (different to P45 which only has April 5th onwards)

(ii) the UK income must be converted to $$$ on a pay day by pay day basis. I believe the website I used to do this was XE.com where you can put in amout and date to calculate.

I produced a list of dates wages $ exchange rate and converted amount and the total amount converted was then transferred to the 2555 EZ

We ncluded this sheet with the tax return.

The allowance of foreign income is way over what you are likely to have earned so is with the time to declare to get the allowance for a wife.

We did this it was a pain but I assume they were happy as we never heard any complaints

Hope this makes sense any questions feel free to pm me

[TracyTN 237]

Widge, I assume you mean you got married in Oct 04 (as you arrived here in Sept 04)?

Other than that, you made total sense to me!

[Linda&Dave 0]

Hi Widge, thanks for the heads up, I see exactly what you mean. However, I think what you propose leaves your tax credit/debit (to the IRS) as zero so I would neither owe tax to the IRS or be owed a refund from them - have I grasped it correctly? Now that seems like a good position to be in but for the fact that I read on a thread somewhere here that if you paid more tax in the UK than you would have if you had earned the same amount of wages in the US, then you are entitled to a refund from the IRS up to a certain limit (and conversly, if you paid less tax in the UK than you would here, you would owe the difference to the IRS) because if you classed as as a 'Resident' then you are assessed by the IRS for the whole of 2005.

As far as I can see there are 2 or 3 different ways you can report your foreign earnings and it is trying to work out the most beneficial way (for me! ) that is so difficult.

But thank you again Widge, at least it seems to me that I have a fallback position if I can't fathom how to get a rebate on my foreign taxes.

[Widge 0]

Hmmm slightly confused here, I am not aware that you can reclaim taxes paid in the UK to the UK govt for work done for a UK company from the US IRS. For any UK taxes paid between April 5th 05 and when you left the UK you should complete UK form P85 and recalim UK tax from the UK Inland Revenue. (Tax paid up to April 5th was in the preceding UK tax year and not reclaimable)

The purpose (for most people myself included) of filing married filing jointly here in the US is to be able to make use of the tax allowance for yourself as wife/resident thus reducing your husbands tax bill and hopefully gaining a nice tax refund cheque (assuming that you are not working and paying taxes yourself)

On the list of UK income furnished with the tax return their is no mention of tax paid or not it was merely a statement of income (the allowance for foreign income that is allowable is pretty high so would doubt you would exceed it)

And yup I did marry in Oct 04 my doesnt time fly :-)

Edited February 1, 2006 by Widge

[Peggy 1]

This just confuses the ####### out of me.

So you are all saying that if you worked in your home country in 2005, that you have to claim what you made. I worked from Jan 1st to mMay 1st. I moved here May 24. Married on August 12. Someone said something about if your a resident. Does that mean when you get your green card or just when you file your AOS. I dont think I am considered a resident yet am I I just have my NOA for AOS, EAD. I didnt think I would claim my earnings here if I still have to file my Canadian taxes for 2005. Confused We actually talked to a guy at an income tax place here, and didnt mention on thing about me having to claim any earnings from Canada. He told us that we could file married/jointy(i think). That we would get a refund for being married and me not working yet in the US.

[mawilson 2,133]

I am really confused between: A: Taking tax paid as a credit (via form 1116) and B: taking tax paid as a deduction on form 1040. What is the difference to me?

It's very simple. A deduction reduces the amount of income subject to tax, a credit directly reduces the tax itself.

[Linda&Dave 0]

It gets better. Check out chapter 6 of Publication 519 on the IRS.gov website. This chapter deals with 'Dual Status' aliens and is applicable for those who arrived in the US during the preceding tax year and qualify as a Resident Alien either by Green Card or by the Substantive Presence Test. In effect dual status aliens are those who are classed as a Resident Alien for part of the year and a Non-Resident Alien for the other part.

Sorry for complicating things but it was a guy on the IRS helpline who told me that I should be classed as Dual Status and I guess that applies to many here too. Here are a couple of exceprts from Publication 519 that effectively say you have a choice of whether to file as Dual-Status or Resident Alien for the entire year...

Choosing Resident Alien Status

If you are a dual-status alien, you can choose to be treated as a U.S. resident for the entire year if all of the following apply.

* You were a nonresident alien at the beginning of the year.

* You are a resident alien or U.S. citizen at the end of the year.

* You are married to a U.S. citizen or resident alien at the end of the year.

* Your spouse joins you in making the choice.

This includes situations in which both you and your spouse were nonresident aliens at the beginning of the tax year and both of you are resident aliens at the end of the tax year.

If you make this choice, the following rules apply.

* You and your spouse are treated as U.S. residents for the entire year for income tax purposes.

* You and your spouse are taxed on worldwide income.

* You and your spouse must file a joint return for the year of the choice.

* Neither you nor your spouse can make this choice for any later tax year, even if you are separated, divorced, or remarried.

* The special instructions and restrictions for dual-status taxpayers in chapter 6 do not apply to you.

Restrictions for Dual-Status Taxpayers

The following restrictions apply if you are filing a tax return for a dual-status tax year.

1) Standard deduction. You cannot use the standard deduction allowed on Form 1040. However, you can itemize any allowable deductions.

2) Exemptions. Your total deduction for the exemptions for your spouse and allowable dependents cannot be more than your taxable income (figured without deducting personal exemptions) for the period you are a resident alien.

3) Head of household. You cannot use the head of household Tax Table column or Tax Rate Schedule.

4) Joint return. You cannot file a joint return. However, see Choosing Resident Alien Status under Dual-Status Aliens in chapter 1.

Apologies if I am complicating matters but it did seem wise to point out the above (and apologies if this repeats earlier posts).

Reading Publication 519 is a must (I've discovered )

[karotte 0]

This may be helpful to some of you as well. Based on what I read and the IRS help line (for whatever it's worth! I'm not sure much!), my husband (who came in Aug 2005) can be treated as a US resident, can take the foreign income exlusion and can file jointly with me. I guess we have to

"Attach a statement, signed by both spouses, to your joint return for the first tax year for which the choice applies. It should contain the following information.

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.

The name, address, and identification number of each spouse. (If one spouse died, include the name and address of the person making the choice for the deceased spouse.) "

I am a nonresident alien. Can I take the foreign earned income exclusion if I meet the bona fide resident test or physical presence test? If yes, what is the tax form used for nonresident taxpayer?

No, nonresident aliens do not qualify for the foreign earned income exclusion. Only if you are a U.S. citizen or a resident alien of the United States and live abroad, may you qualify to exclude a specific amount of your foreign earned income. Refer to chapter 4 of Publication 54 Tax Guides for U.S. Citizens and Resident Aliens Abroad, for limitation that apply. If you are the nonresident alien spouse of a U.S. citizen or resident alien, you can elect to be treated as a U.S. resident in order to file a joint return. In this case, you can take the foreign earned income exclusion if otherwise qualified. Refer to Publication 519, U.S. Tax Guide for Aliens, for detailed instructions on how to make this election.

However, nonresident aliens would be able to exclude their foreign earned income under the dual-status rules. Refer to Tax Topic 852 for dual-status information. A nonresident alien is generally not subject to U.S. tax on compensation for services performed outside the U.S.

References:

Publication 519, U.S. Tax Guide for Aliens

Nonresident Spouse Treated as a Resident

If, at the end of your tax year, you are married and one spouse is a U.S. citizen or a resident alien and the other spouse is a nonresident alien, you can choose to treat the nonresident spouse as a U.S. resident. This includes situations in which one spouse is a nonresident alien at the beginning of the tax year, but a resident alien at the end of the year, and the other spouse is a nonresident alien at the end of the year.

If you make this choice, you and your spouse are treated for income tax purposes as residents for your entire tax year. Generally, neither you nor your spouse can claim tax treaty benefits as a resident of a foreign country for a tax year for which the choice is in effect and you are both taxed on worldwide income. You must file a joint income tax return for the year you make the choice, but you and your spouse can file joint or separate returns in later years.

If you file a joint return under this provision, the special instructions and restrictions for dual-status taxpayers in chapter 6 do not apply to you.

Example.

Bob and Sharon Williams are married and both are nonresident aliens at the beginning of the year. In June, Bob became a resident alien and remained a resident for the rest of the year. Bob and Sharon both choose to be treated as resident aliens by attaching a statement to their joint return. Bob and Sharon must file a joint return for the year they make the choice, but they can file either joint or separate returns for later years.

How To Make the Choice

Attach a statement, signed by both spouses, to your joint return for the first tax year for which the choice applies. It should contain the following information.

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.

The name, address, and identification number of each spouse. (If one spouse died, include the name and address of the person making the choice for the deceased spouse.)

Amended return. You generally make this choice when you file your joint return. However, you can also make the choice by filing a joint amended return on Form 1040X. Attach Form 1040, Form 1040A, or Form 1040EZ and print “Amended” across the top of the corrected return. If you make the choice with an amended return, you and your spouse must also amend any returns that you may have filed after the year for which you made the choice.

You generally must file the amended joint return within 3 years from the date you filed your original U.S. income tax return or 2 years from the date you paid your income tax for that year, whichever is later.