Tax Return Amendments, Help!

[Jamales 1]

My husband and I got married in November 2018 after I moved to the States on K-1 visa. We filed jointly for the year 2018 but we forgot to list my foreign income in the tax return due to our poor of tax filing. We decided to file tax amendments to include the foreign income. I have a question about the form 1040X and I would appreciate if anyone can help!

 

In order to include the foreign income, we need to send in Form 2555, updated form 1040 Schedule 1 and form 1040X. On form 2555, I past the physical presence test, and I am able to use my entire foreign income in 2018 as the foreign income exclusion. Then the number line 45 (which is my entire foreign income) on form 2555 was entered as a negative number on line 21 form 1040 Schedule 1 as other income. My understanding is, on form 1040, the foreign income amount is included in total salary in line 1 and then subtracted in line 6, to arrive at the total adjusted gross income. Basically, the foreign income included in line 1 is offset by the subtraction in line 6. Therefore, the adjusted gross income on form 1040X remains the same as the original return. However, how should I fill out the form 1040X to reflect such change? Is my understanding correct? 

 

Any advice would be much appreciated! Please let me know if my wording is confusing and I will clarify. 

[RandyW 149]

You need to use the Foreign Earned Income Tax Worksheet that is in the 1040 instructions to figure your taxes.

 

If you or your spouse earned any income in the US for 2018, you may actually owe some tax on the "excluded" income.

[Jamales 1]

Thanks! I actually tried to use Turbotax to amend the tax return yesterday and it did show a tax liability.

 

My husband does have earnings in the States. I am not sure if I am reading it wrong, but I thought the foreign earned income exclusion of $103,900 will allow me not to pay tax in the States on the foreign income at all? 

[RandyW 149]

15 hours ago, Jamales said:

Thanks! I actually tried to use Turbotax to amend the tax return yesterday and it did show a tax liability.

 

My husband does have earnings in the States. I am not sure if I am reading it wrong, but I thought the foreign earned income exclusion of $103,900 will allow me not to pay tax in the States on the foreign income at all? 

 

 

The word "Exclusion" is a VERY unfortunate misnomer,  since it leads many people to believe that they are Excluding that income from their Income Tax. You REPORT that income, AND pay taxes on it, as figured by the Foreign Earned Income Tax Worksheet that is in the 1040 instructions. If you have ONLY the Foreign Income, then no taxes are due, unless you exceed the dollar limit. But when US-based income is ALSO reported, it may result in additional tax owed, as you've found out.

From Wikipedia

 

Quote

Although called an exclusion for historical reasons, since the 2006 tax year it is better described as a credit equal to the amount of tax that would have been owed on the eligible foreign income, without considering any deductions or exemptions. The effect of this is to limit the advantage of the exclusion to a reduction in tax of no more than the amount that would apply for a lower income taxpayer, even if the taxpayer is in a higher tax bracket.

 

[Jamales 1]

wow, thanks for the detailed explanations! This makes sense now