Reporting passive foreign income + claiming FTCs on US tax filing (jointly, USC + resident alien for tax purposes)

[JH & EB 26]

Hi community, 

 

My now husband and I are filing 2023 taxes jointly. He entered on k1 in Sept 2023, we married Nov 2023 + filed for AOS, and he’s currently in AOS waiting period (EAD but GC still pending). For tax purposes, we’ll have him considered a resident alien for all of 2023 tax year. He meets the requirements for this. 

 

For any experts out there or anyone with similar experiences who are willing to answer a couple questions, I would greatly appreciate any help with the following: 

 

1. In 2023, he made roughly $15k in passive income from his two vacation rental properties he owns in Italy. He of course pays taxes in Italy and will have precise numbers from his accountant shortly, for reporting exact 2023 income and taxes already paid in Italy, for when we file 2023 taxes in the US. He doesn't may a mortgage on either property; they are each paid off in full. 

 

Am I correct in my understanding that we can report this income and also use form 1116 for FTC (I believe this makes more sense than FEIE given it’s passive, among other factors), to avoid paying “double” taxes on it in the US? US has a tax treaty with Italy and reading through it, I’m almost positive it covers this type of income.

 

Has anyone filed this form using turbo tax / turbo tax deluxe? It says it’s available now and I found instructions how to find it when filing via the software, but curious if anyone has done it that way yet.

 

2.  I’m pretty sure on this now (was very confused with conflicting information at my first stages of research) but in case anyone has handled a similar situation: My husband has a number of private foreign pensions from private employers in the UK, from the 22 years he worked in UK. He is not withdrawing from them. They’re just “sitting there” for now, and will for some time. We don’t need to report / do anything with tax agreements on these for our 2023 taxes right now, correct, since he’s not withdrawing on it? I don’t think any one pension fund is extremely high worth at this point. 

 

Additional details that I don’t think matter but sharing in case they in fact do: 

• Husband is a French citizen but was an Italian resident, living in Italy, since 2017 and up until he moved to the US. He was previously in the UK as a resident. 
• He did not work / have active employment in 2023 in any country (he transitioned his active job within the business in Italy in 2022 because they had found a good replacement and knew we’d be traveling back and forth a lot in 2023).  
• He didn’t have any US income in 2023 (EAD arrived Dec 29 so just getting started on the job hunt). 
• We don’t have children together and do not own property in the US. 
• I am a fulltime salaried employee at my US company. 

 

I was initially searching for a California-based CPA to help with 2023 filing, given my taxes in all previous years have always been super simple. However, after doing more reading on IRS pubs (to understand tax implications for aliens and foreign income) and more recent Intuit forums (re: what forms are available via Turbo. Tax in the current edition), I think I may be able to avoid hiring a CPA. (I was also having trouble finding someone equipped for international tax matters like this, for those like us who are not high wealth individuals with  much more substantial foreign income/assets. Most were for specialized for USC’s with much more substantial foreign income/assets/businesses compared to us.)

 

Thanks so much for in advance,

[Crazy Cat 41,790]

I always suggest seeking the help of a competent tax pro/CPA for these questions the first tax year as a resident.  I think you are correct on #1.  Our tax accountant completes an 1116 for us every year.  For #2, an FBAR might be required depending on what kind of accounts and the balances.  Again, that's another reason to seek experienced, professional help.  Good luck.  

 

[JH & EB 26]

5 hours ago, Crazy Cat said:

I always suggest seeking the help of a competent tax pro/CPA for these questions the first tax year as a resident.  I think you are correct on #1.  Our tax accountant completes an 1116 for us every year.  For #2, an FBAR might be required depending on what kind of accounts and the balances.  Again, that's another reason to seek experienced, professional help.  Good luck.  

 

Thank you! I had a similar question about FBAR for those pensions. The pension matters seemed pretty country / tax treaty specific too and how they’re taxed in the country where they’re held. 
 

Did you seek out any specialities re: international taxes expertise for (not overly complex / high wealth or business) individuals when finding your accountant? I’m having trouble finding someone who really seems to understand situations like ours. I am clearly not using the right key words or something, and I’m usually really good at finding things. (Was actually going to ask you after reading one of your comments in another thread but figured I should probably get someone in California for state implications.)

Thanks again. 

[Crazy Cat 41,790]

1 minute ago, JH & EB said:

Thank you! I had a similar question about FBAR for those pensions. The pension matters seemed pretty country / tax treaty specific too and how they’re taxed in the country where they’re held. 
 

Did you seek out any specialities re: international taxes expertise for (not overly complex / high wealth or business) individuals when finding your accountant? I’m having trouble finding someone who really seems to understand situations like ours. I am clearly not using the right key words or something, and I’m usually really good at finding things. (Was actually going to ask you after reading one of your comments in another thread but figured I should probably get someone in California for state implications.)

Thanks again. 

We have a great CPA who well-versed in tax matters involving foreign income and accounts.  She has done our taxes since 2017.  She does the tax returns, foreign asset reporting, and FBAR.  I can PM you her name if you wish.

[JH & EB 26]

3 minutes ago, Crazy Cat said:

We have a great CPA who well-versed in tax matters involving foreign income and accounts.  She has done our taxes since 2017.  She does the tax returns, foreign asset reporting, and FBAR.  I can PM you her name if you wish.

I would appreciate that so much. Yes, please. Thank you! 

[Tesco 70]

You can only file a 2555 for foreign employment. You may file a 1116 for employment income under the ‘General category’ remember the 2555 excludes that income, the 1116 gives credit for foreign taxes paid and can be carried forward 10 years and back 1. ‘Passive income’ will encompass the rental income.  
you are allowed up to your US tax rate, so if  that’s 12%, and you paid 20% to a foreign country, the difference is banked (carried forward).

 

As for U.K. pension, make sure you file FinCEN114 and also look at IRS form 8938, don’t get caught out on this, as the penalties are catastrophic.

 

[JH & EB 26]

1 hour ago, Tesco said:

You can only file a 2555 for foreign employment. You may file a 1116 for employment income under the ‘General category’ remember the 2555 excludes that income, the 1116 gives credit for foreign taxes paid and can be carried forward 10 years and back 1. ‘Passive income’ will encompass the rental income.  
you are allowed up to your US tax rate, so if  that’s 12%, and you paid 20% to a foreign country, the difference is banked (carried forward).

 

As for U.K. pension, make sure you file FinCEN114 and also look at IRS form 8938, don’t get caught out on this, as the penalties are catastrophic.

 

Thanks so much for your help. So, just to make sure I'm understanding correctly, I am correct that we will only use form 1116 since his only foreign income was the passive income from the vacation rentals. He was not employed - abroad or here - in 2023 so we wouldn't use 2555. Do I have that right?

 

And thanks for the extra flag on FBAR. I didn't realize that applied to foreign pensions but reading more now, understand that it very much does (just diving deeper into all of this now that the AOS paperwork is out of the way). We will do this asap next week; I've having him gather all his pension fund info and balances, from funds in France, UK and Italy as we speak. And I have the question re: 8938 on my list for when we find a CPA qualified for these matters. 

 

(Not looking forward to dealing with all of the financial / reporting / tax matters when he sells the vacation rental properties, but that's a headache for another year.)

 

Thanks again for taking the time to help! 

[NorthByNorthwest 345]

2 hours ago, JH & EB said:

(Not looking forward to dealing with all of the financial / reporting / tax matters when he sells the vacation rental properties, but that's a headache for another year.)

 

Thanks again for taking the time to help! 

 

If you get a CPA they'll help, but don't forget to take the proper depreciation on the rental properties - the day he sells the properties IRS will automatically assume he's taken the depreciations and assess the depreciation recapture accordingly even if he never claimed any depreciations.

Edited January 21 by NorthByNorthwest

[JH & EB 26]

24 minutes ago, NorthByNorthwest said:

 

If you get a CPA they'll help, but don't forget to take the proper depreciation on the rental properties - the day he sells the properties IRS will automatically assume he's taken the depreciations and assess the depreciation recapture accordingly even if he never claimed any depreciations.

Okay thank you and good tip. Saving this for when we get to the point of selling those. I appreciate it! 

[NorthByNorthwest 345]

3 hours ago, JH & EB said:

Okay thank you and good tip. Saving this for when we get to the point of selling those. I appreciate it! 

 

Just to clarify - depreciation is something you claim yearly against the income from the rental, so this can't wait until you sell them. Your tax advisor will help you use the correct depreciation schedule and apply it yearly, it is complicated enough for US rental income, and worse for foreign...

[Tesco 70]

8 hours ago, JH & EB said:

Thanks so much for your help. So, just to make sure I'm understanding correctly, I am correct that we will only use form 1116 since his only foreign income was the passive income from the vacation rentals. He was not employed - abroad or here - in 2023 so we wouldn't use 2555. Do I have that right?

 

And thanks for the extra flag on FBAR. I didn't realize that applied to foreign pensions but reading more now, understand that it very much does (just diving deeper into all of this now that the AOS paperwork is out of the way). We will do this asap next week; I've having him gather all his pension fund info and balances, from funds in France, UK and Italy as we speak. And I have the question re: 8938 on my list for when we find a CPA qualified for these matters. 

 

(Not looking forward to dealing with all of the financial / reporting / tax matters when he sells the vacation rental properties, but that's a headache for another year.)

 

Thanks again for taking the time to help! 

Yes 1116, 2555 is only for FEIE. There are several 1116 ‘baskets’, the passive income on is what you need.

FBAR is simple, just use the same pdf each year and change the ‘maximum value’, save and upload-very easy. He may not know the maximum value of any pension, so the ‘maximum value unknown’ comes into play. If there’s has been no pension distribution the 8938 would be $0 and no tax associated. Your international Accountant will be well versed in the onerous form 3520. This form is not for the faint hearted, but U.K. pensions are IRS qualified, not sure about the EU ones though. Good luck with it all, my advice would be to keep financial affairs outside the US as simple as possible, unless you have a significant footprint and the resources to employ experts to keep you on the right side of the IRS, SEC & US Treasury. 

 

[JH & EB 26]

On 1/20/2024 at 10:32 PM, NorthByNorthwest said:

 

Just to clarify - depreciation is something you claim yearly against the income from the rental, so this can't wait until you sell them. Your tax advisor will help you use the correct depreciation schedule and apply it yearly, it is complicated enough for US rental income, and worse for foreign...

Thanks so much for clarifying. I literally had no idea that we would do this on foreign owned vacation rental properties. I have added this to the list of questions for when we find/talk to an international accountant. 

[JH & EB 26]

On 1/21/2024 at 1:41 AM, Tesco said:

Yes 1116, 2555 is only for FEIE. There are several 1116 ‘baskets’, the passive income on is what you need.

FBAR is simple, just use the same pdf each year and change the ‘maximum value’, save and upload-very easy. He may not know the maximum value of any pension, so the ‘maximum value unknown’ comes into play. If there’s has been no pension distribution the 8938 would be $0 and no tax associated. Your international Accountant will be well versed in the onerous form 3520. This form is not for the faint hearted, but U.K. pensions are IRS qualified, not sure about the EU ones though. Good luck with it all, my advice would be to keep financial affairs outside the US as simple as possible, unless you have a significant footprint and the resources to employ experts to keep you on the right side of the IRS, SEC & US Treasury. 

 

Thanks so much. This is really, really helpful. 3520 is new to me so adding to the list to ask the international accountant about when we find one. Great flag. Yes, agree re: keeping it simple. Right now it's just figuring out how to manage what he already had, and how we need to plan in advance for when the time comes to sell those properties, and what we'll need to do should we stay here in retirement vs going to Europe (long ways a way but we should be planning now).