Question about Form 8938

[vsundar]

My spouse, a NZ citizen and a green card holder, moved to US permanently in Feb 2024. She has bank accounts, 401k equivalent investments etc. (total > 300K USD) in NZ. For Jan 2024, she was paid income and taxes were automatically deducted by NZ govt. I will file FBAR/FINCEN 114 as net assets > $10K but do I need to file form 8938? Do I need to report foreign income earned in Jan 2024 even though taxes were already deducted by IRD, NZ?

[SusanY1]

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.  

[vsundar]

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!

[DaveF1006]

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?

@vsundar 

[vsundar]

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.

[DaveF1006]

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.

@vsundar 

[vsundar]

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?

[DaveF1006]

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

[vsundar]

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.

[DaveF1006]

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

@vsundar 

[vsundar]

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?

[DaveF1006]

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.

@vsundar 

[vsundar]

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

[vsundar]

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.

[DaveF1006]

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.