Question about Form 8938

When living in the US, citizens and permanent residents should file Form 8938 when the aggregate value of their foreign financial accounts exceeds $50,000 ($100,000 when filing a joint return with a spouse). 

Therefore, it sounds like this  year she should file that form with her return.  

As a permanent resident, she is required to report all of her worldwide income., so she will need to include the income earned while in New Zealand. 

She can also report the taxes paid on that income for a foreign tax credit on the US tax return to mitigate double taxation.  

Thanks for the information. Can you please let me know where I need to fill the details in turbo tax:

1. Form 8938

2. Income for 1 month with taxes already.

3. Interest paid on assets  and taxes deducted already.

The current form in turbo tax assumes the W2 submitted as foreign income which is not the case.

Thanks!

To clarify, for question 2, was the income reported on a W2? In question 3, did you pay the interest or was the interest paid to you?

@vsun 

Hi Dave,

For Q2, my spouse worked in NZ as a NZ citizen in Jan'24 and moved over to US in Feb'24 on a GC. So, no W2 was issued.

Interest was paid on deposits she had as a NZ citizen and NZ govt also deducted appropriate taxes.

I would like to list the income and interest in the joint tax filing that we will do for 2024 but also wanted to make sure I am not subject to double taxation or have to pay taxes again for this income earned in NZ.

Hope that helps.

Yes, you will need to pay taxes in both countries but you can claim a foreign tax credit for the interest income taxed in NZ. To enter the income first.

1. Log in to TurboTax: Open your TurboTax account and start a new return or continue an existing one.
2. Navigate to Income Section: Go to the "Federal" section and then click on "Wages & Income."
3. Add Income: Click on "Add Income" and select Investments and Savings (1099-B, 1099-INT, 1099-DIV, 1099-K, Crypto) if using desktop, it is Interest and Dividends
4. Enter Interest Income: Choose "Interest on 1099-INT" and click on "Start" or "Update."
5. Enter Details.  Since you have no 1099 INT statement, you will need to enter the information like you do have one. If you paid foreign taxes on this income, enter the foreign tax paid in Box 6.

Now to get credit for the foreign taxes paid. 

1. Go to Federal
2. Deductions and credits 
3. Estimate and other taxes paid 
4. Foreign Tax Credit>start or revisit
5. TurboTax will guide you through filling out Form 1116, Foreign Tax Credit. You'll need to provide details about the foreign taxes paid, the country where the income was earned, and other relevant information.

@vsun 

Hi,

How do I enter foreign Income? Should that be entered in "Investments & Savings"?

There's also a separate section "Foreign Earned Income and Exclusion"? What should I do with this?

To clarify, what type of foreign income do you have to report?

Hi,

I have the following:

a) Foreign Income (wages not on W2) and taxes paid. Where do I enter this esp. the taxes?

b) Foreign Interest (based on savings account interest) since spouse has savings account there -> This I entered in the 1099 INT section as you detailed in the previous email.

Yes, to enter the foreign income, go to:

1. Log into your account
2. Select Wages and income
3. Less Common Income
4. Foreign Income and Exclusion

To receive credit for the foreign tax you paid:

• Go to Federal
• Deductions and credits 
• Estimate and other taxes paid 
• Foreign Tax Credit>start or revisit

@vsun 

Hi,

As I went through the below process, I have a few more questions:

1. My spouse was in NZ from 2014 - Feb 05 2024 and was a NZ citizen. She moved to USA on a GC on Feb 07 and has been here since then. Question is for foreign exclusion and tax, the tool is asking for a physical presence or bonafide test...I don't know how to answer this given the situation above - In 2024, spouse was in NZ for one month but as a NZ citizen, not a resident alien of US etc.

2. The tool during the deductions step also mentions some tax credits and says the tax credits have been maxed out for the year and will be applied for the next year etc...what does this mean? Is there another better way to figure this out? How will know how much credits will be applied next year?

3. Even though the taxes on wages and interest for foreign income has been paid, the federal refund still is charging me for additional taxes when I add these through the steps you mentioned. How can I fix this?

Yes, let's take each question  one at a time.

1. You are reporting your wife's foreign income. You may be trying to see if you can receive a foreign income exclusion for her but this is only for US Citizens that are residing in a foreign country.  To qualify, they need to either be eligible under the physical presence test or bonafide residence test. Your wife is this case would not be eligible to exclude her foreign income because she is not a US Citizen or Resident Alien. She is neither of these but if you are making the election to choose her as a Resident Alien for tax reporting purposes only and allow you to Married Filing joint.
2. You are eligible for the Foreign Tax Credit but you are unable to use it this year. It then will be carried forward to the next ten years to help offset future foreign income. The foreign tax credit is non refundable credit that helps reduce tax liability  to zero. if your tax liability was already zero, then none or little of the credit is applied thus will carryover for the next ten years.
3. If you are referring to US taxes paid through withholdings, you will be given credit for those tax payments.  If it is Foreign Taxes, then from what you tell me, the credit is applied but not being able to be used because of limited tax liability to apply the credit.

@vsun 

Thanks Dave.

Also, can you please help me understand what the screenshot means?

Details:

So as per your #1, spouse is not eligible for foreign exclusion, correct?

Details of NZ below: all #'s are in USD.

Wages Income: $13877; Taxes: $3860.5

Interest Income: $15812; Taxes: $4356

Now for the tax credits, I have attached the screenshot below - can you please explain what this means? I cannot file anything for 2023. However my federal tax return increased from $1800 to $4100 approx.Foreign credit

Also, where can I enter the taxes paid for foreign wages...there is no field that captures this information in this whole process. I think that's the reason why federal taxes are higher..

For foreign interest income, I entered the foreign paid taxes in INT-1099 manually.

You will need to apply for a foreign tax credit for the foreign wages that you report to avoid being double-taxed.

1. Go to Federal
2. Deductions and credits 
3. Estimate and other taxes paid 
4. Foreign Tax Credit>start or revisit
5. When it asks We just need to check if you have any uncommon situations indicate I paid foreign taxes on income I earned while working in another country. 
6. At some point in the interview, it will ask if you wish to take a deduction or a credit. If you are able to itemize deductions, you may consider taking the deduction.
7. There will be questions in the next screen asking you the description of the Foreign Taxes paid and the amount.
8. If you find that this has no effect on your tax return, you may circle-back and choose you wish to take a credit.
9. Navigate and record the entries that the program asks for and when you reach the page that mentions Foreign Tax Credit Worksheet, this is where you take notice.
10. The first that you will be asked is what category of income is it, you will say general category income.
11. Next screen will say Country Summary, select add a country 
12. When it says Other Gross Income - XXXX, Here you put in the Gross Amount you earned in that country. 
13. Then you will navigate through the screens until you come to a screen that says Foreign Taxes Paid - XXXX, here is where you record the amount paid under Foreign Taxes.
14. Finish out the section. 

You may need to repeat this process twice because you need to prepare separate worksheets for the two types of income, General Category Income for your wages and Passive Category income for your foreign interest income. 

Thanks Dave!

One other question:

I found this on the IRS website: https://www.irs.gov/individuals/international-taxpayers/foreign-tax-credit-compliance-tips. Is this applicable to me? Do they mean report the income lower but include the taxes paid in NZ? Thanks!

Foreign source qualified dividends and gains

If you receive foreign source qualified dividends and/or capital gains (including long-term capital gains, unrecaptured section 1250 gain, and/or section 1231 gains) that are taxed in the U.S. at a reduced tax rate, you must adjust the foreign source income that you report on Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), line 1a.

How do I make the adjustment?

• Form 1116 Instructions - See the detailed instructions for "Foreign Qualified Dividends and Capital Gains (Losses)."
• Generally, if the foreign source income is taxed at the 0% rate, then you must exclude the income from your foreign source income (Form 1116, line 1a).
• Generally, if the foreign source income is taxed at the 15% rate, then you must multiply that foreign sourced income by 0.4054 and include only that amount in your foreign source income on Form 1116, line 1a.
• Generally, if the foreign source income is taxed at the 20% rate, then you must multiply that foreign source income by 0.5405 and include only that amount in your foreign source income on Form 1116, line 1a.
• Generally, if the foreign source income is taxed at the 25% rate, then you must multiply that foreign source income by 0.6757 and include only that amount in your foreign source income on Form 1116, line 1a.
• Generally, if the foreign source income is taxed at the 28% rate, then you must multiply that foreign source income by 0.7568 and include only that amount in your foreign source income on Form 1116, line 1a.
• See Publication 514, Foreign Tax Credit for Individuals, for more information on the rate differential adjustment for the applicable year. Note: The above rate differential factors are taken from the 2023 Publication 514.

Yes, these adjustments are applicable to you, if you have qualified dividends or capital gains, under the following two conditions.

1. You have foreign qualifying dividends or long-term capital gains totaling more than $20,000, OR
2. Your total income exceeds certain thresholds based on your filing status. The thresholds are:

• $383,900 if married filing jointly or qualifying surviving spouse,
• $191,950 if married filing separately,
• $191,950 if single, or
• $191,950 if head of household

The link you provided me is for the 2024 Publication 514 so these percentage rates you quoted are applicable for 2024.

[Edited 02/21/25|5:15 am PST]

Hi Dave,

Just to be clear:

Is this applicable only for Income from dividends & capital gains, not for income from interest, wages etc.?

My spouse doesn't have any income from dividends & capital gains. 

Yes, this is applicable for qualified dividends and capital gains and not from interest and wages. 

@vsun 

Hi Dave,

One last thing I wanted to check:

Excess credit: is available for both foreign wages and Interest income. In the future, there would not be any foreign wages - so can I still apply this credit in the future? If not, how can I use it to the max this year?

Yes. Any excess Foreign Tax Credit unused this year can be carried back one year and carried forward for ten years. Turbo Tax will keep a record of those carryovers to apply to past or future returns as long as there is foreign income to offset the credit in those future or past year.

If there is an excess credit this year, here is no way you can use it to the max this year.

@vsun 

Thanks Dave!

Question is do the excess income credits apply only to income and excess interest credits apply only to interest income in the future? Since there is no scope of future foreign income, where do I apply the excess income credit?

When you carry over unused foreign tax credits, they must be applied to the same category of income in future years. For example, if you have a carryover from passive income, it can only be used to offset passive income in future years.

If you want more detailed information, you can check out the IRS instructions for Form 1116.

@vsun 

Thanks Dave!

Since I know there will be no passive foreign income (wages) in the next year onwards, how do I utilize the EXCESS foreign tax credit for this year itself? Is there a way to reduce the losses as I will be paying more taxes with no means to gain it in the next year or future? 

No. If you are unable to use your full carryover this year, to claim your full allowable foreign tax credit for 2024 (up to the limit of your tax liability), the carryover will remain untouched until it expires. You need to have future passive income to be able to use the carryover, if the need arises. 

@vsun