First year filing taxes after K1

[K + M 47]

3 minutes ago, Wuozopo said:

That is a question most do not understand. The total of the foreign income is not simply erased like most presume. Unless you were going through the instructions manually, you wouldn’t ever notice how the tax is calculated. Tax programs just do their magic and never tell you why. 
 

From the IRS instruction book for the 1040 found here https://www.irs.gov/pub/irs-pdf/i1040gi.pdf

On page 31 it says

Foreign Earned Income Tax Worksheet.

If you claimed the foreign earned income exclusion, housing exclusion, or housing deduction on Form 2555, you must figure your tax using the Foreign Earned Income Tax Worksheet

 

You can find the worksheet on the next page of the instructions, p. 32. 
 

That means you do not simply use your taxable income line (11b on the 1040) and figure the tax on that amount like most do. You have to use the worksheet to figure the tax. You can look at the worksheet and fill in your numbers or just listen to my abbreviated summary of what the worksheet does.

 

1. Combine the taxable income (11b) plus the foreign income and look up the tax for that total on the tax tables.
2. Look up the tax that the foreign alone would generate.
3. Subtract: #1 minus #2 equals Tax.

So what you are really excluding is the tax that foreign income would cost you if the US taxed you on it. It often comes out as more tax than just erasing the whole foreign income as if it never existed. 
BUT it is still better than your alternative if the USC filed Married Filing Separately.  By adding the spouse and foreign income, the USC gets an extra $12,200 Standard deduction off their taxable income which accounts for the better deal. 
 

Did you follow that? 😊

 

 

 

Understood everything up until the bolded section, and this is my understanding of it.  Why was there 12,200 x2 against the salary being added on for deductions.  

[Wuozopo 4,293]

32 minutes ago, Kerri and Myles said:

Understood everything up until the bolded section, and this is my understanding of it.  Why was there 12,200 x2 against the salary being added on for deductions.  

Look at Form 1040 https://www.irs.gov/pub/irs-pdf/f1040.pdf

Seriously print the form and look at it while you read this.

Lines 1-8b is putting in all the kinds of income one might have. Not everybody has the same. Some only have wages. Others may have pensions, or Social Security income, or interest earned, or stock dividends. Once you get to 8b, Total Income, that should be every bit of income you have to report. 
 

Then the IRS gives you a break and reduces your income that has to be taxed. (See Line 9)  You have a choice...take the “standard deduction” that they offer. Or “itemize deductions” if you can come up with more than the IRS offers. Look up Schedule A if you want to see what can be an itemized deduction. The standard deduction is pretty huge since the new tax laws started in 2018 so it would be hard to beat unless you donated tens of thousands to charity every year. 
 

Now looking back on Form 1040, on the left in a white box you will see the Standard deduction allowed for various filers.

Since the foreign income’s tax amount is subtracted out, the USC gets a big boost by reducing their income by $24,400 instead of just $12,200. It’s never going to be this good again. Next year both spouses will have fully taxable incomes. This is the year to take advantage of that joint standard deduction while the foreigner’s income isn’t taxed.

 

Edited February 1, 2020 by Wuozopo

[K + M 47]

3 minutes ago, Wuozopo said:

Look at Form 1040 https://www.irs.gov/pub/irs-pdf/f1040.pdf

Seriously print the form and look at it while you read this.

Lines 1-8b is putting in all the kinds of income one might have. Not everybody has the same. Some only have wages. Others may have pensions, or Social Security income, or interest earned, or stock dividends. Once you get to 8b, Total Income, that should be every bit of income you have to report. 
 

Then the IRS gives you a break and reduces your income that has to be taxed. You have a choice...take the “standard deduction” that they offer. Or “itemize deductions” if you can come up with more than the IRS offers. Look up Schedule A if you want to see what can be an itemized deduction. The standard deduction is pretty huge since the new tax laws started in 2018 so it would be hard to beat unless you donated tens of thousands to charity every year. 
 

Now looking back on Form 1040, on the left in a white box you will see the Standard deduction allowed for various filers.

Since the foreign income’s tax amount is subtracted out, the USC gets a big boost by reducing their income by $24,400 instead of just $12,200. It’s never going to be this good again. Next year both spouses will have fully taxable incomes. This is the year to take advantage of that joint standard deduction while the foreigner’s income isn’t taxes.

 

I am not certain but for some reason the bolded section is just completely confusing me, I don't understand how you got to 24.4k being reduced intstead of 12.2k.  I understand that the foreign income is subtracted out as that is the excluded income so the income can't be taxed in home country and then again by the IRS which is why we fill in form 2055.  But I am not understanding the whole reasoning behind what exactly is being taken advantage of.  What exactly is the USC getting a big boost here, how are they reducing their income by 24.4k, and how is that a boost?  Sorry for the question, but I really am trying my best to completely understand this.

[Wuozopo 4,293]

2 minutes ago, Kerri and Myles said:

I am not certain but for some reason the bolded section is just completely confusing me, I don't understand how you got to 24.4k being reduced intstead of 12.2k.  I understand that the foreign income is subtracted out as that is the excluded income so the income can't be taxed in home country and then again by the IRS which is why we fill in form 2055.  But I am not understanding the whole reasoning behind what exactly is being taken advantage of.  What exactly is the USC getting a big boost here, how are they reducing their income by 24.4k, and how is that a boost?  Sorry for the question, but I really am trying my best to completely understand this.

Are you even looking at the form? Look at the white box kinda pointing to Line 9. It says:

 

Standard Deduction for—
• Single or Married
filing separately,
$12,200

• Married filing
jointly or Qualifying widow(er), $24,400

• Head of household, $18,350

 

If you file single or Married Filing Sepatately, the IRS allows $12,200 to be taken off total income.

If you file Married Filing Jointly, then the IRS allows $24,400

That’s just what the IRS says you get depending on how you file. 

[Wuozopo 4,293]

32 minutes ago, Kerri and Myles said:

What exactly is the USC getting a big boost here, how are they reducing their income by 24.4k, and how is that a boost?  Sorry for the question, but I really am trying my best to completely understand this.

Let’s put some real numbers to it.

 

Take a total income of $ 60, 000

 

Married Filing Separately standard deduction of $12,200

So taxable is ($60,000-$12,200) 48,800

Look up the tax for Married Filing Separately on $48,800

Tax $6600

 

Married Filing Jointly standard deduction is $24,400

So taxable is (60,000-$24,400) $35,600

Look up the tax for Married filing joint on $35,600.

Tax $4081

 

Which do you choose to pay?

[K + M 47]

21 minutes ago, Wuozopo said:

Are you even looking at the form? Look at the white box kinda pointing to Line 9. It says:

 

Standard Deduction for—
• Single or Married
filing separately,
$12,200

• Married filing
jointly or Qualifying widow(er), $24,400

• Head of household, $18,350

 

If you file single or Married Filing Sepatately, the IRS allows $12,200 to be taken off total income.

If you file Married Filing Jointly, then the IRS allows $24,400

That’s just what the IRS says you get depending on how you file. 

Looking at the form here now, and from what I can understand does the 12.2k equal each person so 12.2k for each spouse meaning thats where the 12.2k x2 for MFJ deduction comes from to total income?

 

2 minutes ago, Wuozopo said:

Let’s put some real numbers to it.

 

Take a total income of $ 60, 000

 

Married Filing Separately standard deduction of $12,200

So taxable is ($60,000-$12,200) 48,800

Look up the tax for Married Filing Separately on $48,800

Tax $6600

 

Married Filing Jointly standard deduction is $24,400

So taxable is (60,000-$24,400) $35,600

Look up the tax for Married filing joint on $35,600.

Tax $4081

 

Which do you choose to pay?

Definitely the $4,081.  Does make a lot more sense with some numbers put into it.  

 

From all I have understood so far is everything that needs to be filled out to file taxes as follows:

 

Form 2055 (to figure out foreign earned income to be excluded), Form 1040 (using w-2 from USC and P45 from UK wife for her 2019 income), and the letter stating NRA to be treated as RA with all the required information stated in the pub. 519 signed/dated by both spouses so can file as MFJ?  Am I missing something here?

[K + M 47]

21 minutes ago, Wuozopo said:

Let’s put some real numbers to it.

 

Take a total income of $ 60, 000

 

Married Filing Separately standard deduction of $12,200

So taxable is ($60,000-$12,200) 48,800

Look up the tax for Married Filing Separately on $48,800

Tax $6600

 

Married Filing Jointly standard deduction is $24,400

So taxable is (60,000-$24,400) $35,600

Look up the tax for Married filing joint on $35,600.

Tax $4081

 

Which do you choose to pay?

Also I would like to ask, is there a line to how low the income can be, lets say gross making per year someone is doing $40k, they are MFJ, would they take $24.4k off that $40k? Meaning there taxable income being only $15.6k?  Then lets say there federal income tax withheld for the year was $3,850, if you check the current chart that would mean they paid $3,850 on only having to pay $1,220 taking the math they would get a refund of $2,640?  This seems too good to be true, so I am assuming there is a sort of clause to this because then every person making like $30k/yr that is married would get really big refunds just for being married.

 

Another thought, when figuring out foreign income to be excluded what if the NRA did not make enough to have to file taxes for that year so that money was never filed for taxes, does it still meet eligibility to be excluded? Also does the UK take taxes out of paychecks before they issue them?

Edited February 1, 2020 by Kerri and Myles

[Wuozopo 4,293]

@Kerri and Myles
 

Wuozopo has left the building.

Dinner then TV time. 
 

You know I could have done your entire tax return for you in less time than explaining a few concepts has taken, but I appreciate your eagerness to learn.  😉

[geowrian 22,337]

42 minutes ago, Kerri and Myles said:

Also I would like to ask, is there a line to how low the income can be, lets say gross making per year someone is doing $40k, they are MFJ, would they take $24.4k off that $40k? Meaning there taxable income being only $15.6k?  Then lets say there federal income tax withheld for the year was $3,850, if you check the current chart that would mean they paid $3,850 on only having to pay $1,220 taking the math they would get a refund of $2,640?  This seems too good to be true, so I am assuming there is a sort of clause to this because then every person making like $30k/yr that is married would get really big refunds just for being married.

Correct. The tax would be applied to only $15.6k of income (barring any other adjustments).

The refund would be $withheld - $taxes (again, assuming no adjustments, credits, penalties, etc.). Assuming your $1220 in taxes is correct (I'm not looking at the chart right now), then the refund would be $2640.

 

If you had $24.4k (or less) earned, you would get back the entire amount withheld (again, ignoring any other factors).

Then again, you would absolutely need it - good luck living on $24k/year between at least 2 people (barring some fairly unique tax situations).

 

Many married people do get "large" refunds. Many people owe at the end of the year too. Obviously it depends on one's particular circumstances.

 

Here's one for you - when my wife arrived in the US, she had no US income that tax year, and all of her foreign income was excluded via the FEIE. That alone resulted in several thousand more of a refund (meaning above the refund I would have received if I was not married).

Obviously it's not nearly as much money as if she had worked, but the extra money made the adjustment period just a bit easier.

 

2 minutes ago, Wuozopo said:

You know I could have done your entire tax return for you in less time than explaining a few concepts has taken, but I appreciate your eagerness to learn.  😉

I think we all appreciate the patience and explanations!

Edited February 1, 2020 by geowrian

[panamerican 36]

3 hours ago, Wuozopo said:

That is a question most do not understand. The total of the foreign income is not simply erased like most presume. Unless you were going through the instructions manually, you wouldn’t ever notice how the tax is calculated. Tax programs just do their magic and never tell you why. 
 

From the IRS instruction book for the 1040 found here https://www.irs.gov/pub/irs-pdf/i1040gi.pdf

On page 31 it says

Foreign Earned Income Tax Worksheet.

If you claimed the foreign earned income exclusion, housing exclusion, or housing deduction on Form 2555, you must figure your tax using the Foreign Earned Income Tax Worksheet

 

You can find the worksheet on the next page of the instructions, p. 32. 
 

That means you do not simply use your taxable income line (11b on the 1040) and figure the tax on that amount like most do. You have to use the worksheet to figure the tax. You can look at the worksheet and fill in your numbers or just listen to my abbreviated summary of what the worksheet does.

 

1. Combine the taxable income (11b) plus the foreign income and look up the tax for that total on the tax tables.
2. Look up the tax that the foreign alone would generate.
3. Subtract: #1 minus #2 equals Tax.

So what you are really excluding is the tax that foreign income would cost you if the US taxed you on it. It often comes out as more tax than just erasing the whole foreign income as if it never existed. 
BUT it is still better than your alternative if the USC filed Married Filing Separately.  By adding the spouse and foreign income, the USC gets an extra $12,200 Standard deduction off their taxable income which accounts for the better deal. 
Separately the filer takes $12,200 off their taxable income

Joinly, the filers take $24,400 off the taxable income.
 

Did you follow that? 😊

 

 

 

This is better than any explanation I can offer. The point is that I can reduce my tax liability by $24,400 as opposed to $12,200 if we filed separate. She has no US income so that second standard deduction of $12,200 would not exist. I say this goes against 'my income' because she did not add anything to the joint income for 2019 therefore I get twice the benefit without any added tax liability. I believe if we filed separate, her income would have been so low that she wouldn't even need to file taxes.

 

Believe me, I learned a lot about taxes this time around. Before this year, I was so used to just tossing a W-2 and some student loan interest form in to H&R Block online and letting it go. It will definitely be worth your time to review this and understand it moving forward.

Edited February 1, 2020 by panamerican

[K + M 47]

2 hours ago, Wuozopo said:

@Kerri and Myles
 

Wuozopo has left the building.

Dinner then TV time. 
 

You know I could have done your entire tax return for you in less time than explaining a few concepts has taken, but I appreciate your eagerness to learn.  😉

I fully believe that, the knowledge about this is invaluable, and that is why I am so thankful about it.  

 

So if I am understanding everything fully this is everything I have to do to file taxes as first year after K1:

 

Exclusion Form 2055 to figure out amount of foreign income that is going to be excluded - this number is the same number as made in the tax year 2019 as stated on P45 correct?

 

My w-2 stating my income 2019 from my employer (I have that)

 

Form 1040

 

Letter with correct information stated from Publication 519 on how to fill out the letter - signed and dated by both spouses stating want NRA treated as RA for tax year 2019.

 

Taxable income will be USC W-2 income 2019 + Foreign Spouse Worldwide income - Foreign Excluded income(from my understanding would mean would just be working with USC income at this point as foreign spouse worldwide income - foreign excluded income would cancel out as both the same) - deductions which would be 24.4k as 12.2k + 12.2k for MFJ.  

 

if there is anything else please let me know! I have enjoyed all the help so far you all are amazing.

 

 

[K + M 47]

I thought of something I would like to ask if the way I think taxable income in this matter wouldn't be exactly as this from my previous post:

 

1.Taxable income will be USC W-2 income 2019 + Foreign Spouse Worldwide income - Foreign Excluded income(from my understanding would mean would just be working with USC income at this point as foreign spouse worldwide income - foreign excluded income would cancel out as both the same) - deductions which would be 24.4k as 12.2k + 12.2k for MFJ.  

 

2.But it would be as this:  USC W-2 income 2019+Foreign Spouse Worldwide Income (The foreign excluded wouldn't be kept from the taxable total, but it would be telling the IRS that taxes have already been withheld from it, but it would still contribute to the total taxable income), then this total taxable income amount - all deductions here being 12.2k+12.2k=24.4k, so if we just say for hypothetical sense there was a total taxable income of 60k after adding in both spouses would be 60k-24.4k = 35.6k, then that 35.6k then using #federal withheld - tax bracket amount owed = if refund or owe.   

 

Statement 1 is stating its just the USC income that contributes as taxable income as the income for the foreign spouse does not contribute to total taxable income as its excluded from that (I think this is incorrect), and statement 2 states that the taxable income is USC income + foreign spouse income to make a total combined taxable income, and that the 2055 is simply stating that the foreign income has had taxes paid on it so the IRS can't double tax it, but this foreign income still contributes to adding to the whole to make a total taxable income.

 

Me personally I think statement 2 is correct as everything falls into place with it, but please let me know, would love for this to be confirmed by all of you people who definitely are more advised in this than me, but hey I am loving this learning experience! 😀  

 

 

[Wuozopo 4,293]

@Kerri and Myles

 

How are you planning to do your taxes? Your descriptions are as if you are putting it all together in you head first. If you use a tax program, you go through a series of questions aimed at collecting all the information about earnings and things that would allow adjustments or credits then the magic of software fills out the needed forms and does the calculations for you.  
 

Another option is on your own with the forms and instructions from IRS. The instructions for Form 1040 take you through things step by step. They point you toward other Forms or Schedules if needed. Even the forms have directions to follow like  “Enter this on Line 7, subtract the higher of Line 6a or 5b, Enter the results in Line 8”. Those are just made up line numbers to show how the forms themselves guide you. But the instructions give you the details and knowledge and rules.
 

i can’t answer your previous summaries because I don’t know if your spouse earned any interest from a bank account, contributed to an IRA, had college tuition, has a child, owns rental property, sold stock this year etc...  There is no paragraph that can easily summarize your individual tax situation. 
 

It’s something you have to wade through on your own and then look at the final results and analyze how all the parts came together. I don’t think you have really looked at the actual forms yet or are familiar with the difference in Total Income, AdjustedGross Income, Taxable Income. 
 

You’ve listed some forms you understand will be needed. Are there more? That depends on your situation.

Here’s a test for you to show me you are looking at the forms.  Look at Form 2555 Foreign Income Exclusion. See Part VIII Line 45, which is the last thing you will enter on that form.  What does Line 45 tell you to do with your calculated Foreign Earned Income Exclusion? 

[Wuozopo 4,293]

8 hours ago, Kerri and Myles said:

 

2.But it would be as this:  USC W-2 income 2019+Foreign Spouse Worldwide Income (The foreign excluded wouldn't be kept from the taxable total, but it would be telling the IRS that taxes have already been withheld from it, but it would still contribute to the total taxable income), then this total taxable income amount - all deductions here being 12.2k+12.2k=24.4k, so if we just say for hypothetical sense there was a total taxable income of 60k after adding in both spouses would be 60k-24.4k = 35.6k, then that 35.6k then using #federal withheld - tax bracket amount owed = if refund or owe.   

You forgot the part about when you claim a Foreign Income Exclusion, you don’t go straight to the tax owed on taxable income. You calculate the tax using the Foreign Income Worksheet on page 32 of the 1040 instructions.  (Or you let tax software do all the tax figuring in the background)

Edited February 1, 2020 by Wuozopo

[K + M 47]

14 hours ago, Wuozopo said:

You forgot the part about when you claim a Foreign Income Exclusion, you don’t go straight to the tax owed on taxable income. You calculate the tax using the Foreign Income Worksheet on page 32 of the 1040 instructions.  (Or you let tax software do all the tax figuring in the background)

Which tax software do you suggest? I want to make this as easy as possible for us.