Foreign income where to report not sure

[Pooja Singhi]

Hi Team,

  I have foreign income from salary, interest and Capital Gain. Where am I suppose to enter the foreign income part? When I click on foreign income, it takes me to foreign income and exclusion page. I want to check what will be beneficial for me- Taking the foreign tax credit or taking the foreign earned income exclusion. I meet the Physical presence test. I paid taxes in country with higher taxes than USA.

Is the place to enter foreign income the same for foreign tax credit and foreign earned income exclusion? This is so confusing and killing me.

When I go to foreign tax credit section, it asks me to enter income. Is that the only place were I need to enter income or do I need to first include income in the Income section. Please help

[pk]

@Pooja Singhi , need more info on the exact situation --

(a) are US citizen / GreenCard ?

(b) your foreign income is from which countr( y/ies)  --- wages , interest and capital gain ?

(c) how did you file for 2021 --- with foreign tax home or US tax home?

(d) if you are employed or self-employed  in a foreign country , when did you arrive there  and are you still there ?

(e) do maintain a separate householf for your family or are they with you in the foreign country?

(f) If you are not a citizen of US , then which country are you citizen of ?

Pooja ji , please answer these question and I will circle back and help based on your exact  facts and circumstances.

Namaste ji

pk

[Pooja Singhi]

(a) I am a US resident alien but worked in India for part of the year in 2022 and earned Indian salary. 

(b) India

(c) US tax home as I was in US for the whole of 2021.

(d) I was employed for Sept 2021-October 2022 in India and came to US in October . I stayed continuously for 365 days in India but when I claim Foreign earned income exclusion the software shows I owe $3000 in taxes, so I was thinking to claim foreign tax credit as in India I paid 20% taxes .

(e) My husband is in USA and I was working in India for a year and now came back to US and started working in US

(f) India

(g) I filed retrun in India as resident in FY 21-22. Now I want to file married filing jointly with my husband. Actually in 2022 I meet the residency test of both India and USA

[pk]

@Pooja Singhi , 

1. If you file jointly with your husband then your foreign tax credit , while recognized US$ for US$, the amount allowed would be based on a ratio of your foreign income to your joint world income and so unless your income in India was much higher than that of your Husband's US income, you will get a smaller allowable credit for the year. The unallowed portion of the credit is available for use against tax on 2021 foreign income or in future years  provided you have foreign income on those years .  It is generally a losing proposition as the mop-up of the foreign tax credit is almost always asymptotic. If you do not plan to go work abroad i.e have foreign income, it may not be a good idea.

2. If you file Married f Filing Separate ( MFS)  then because your world income is the same as your world income for 2022, you may be able to use up all or most of your foreign tax credit.

3. Assuming that you have already taken care of your foreign earnings for the period Sept 2021 through 12/31/2021 and here we are talking only about foreign earnings  01/01/2022 through 09/30/2022 or thereabouts.

4.  Whether you worked as self-employed or for an Indian entity,  for US tax purposes  you essentially file as self-employed thus triggering  SECA ( Self-Employment Tax ) equivalent to FICA ( Social Security and Medicare  taxes but at 15.3% because there is no employer to share with ).   Thus even if you are able to exclude all your foreign Earned Income ( and housing ) you still have to pay the SECA --, implying your Indian wages excluded is around 20K or thereabouts.  On your AGI you should therefore  see an adjustment of $1500 or thereabouts to equalize ( token )  the field with US wage earners.

Does this make sense ? And is there more I can do for you ?

Namaste Pooja ji

pk

[Pooja Singhi]

Thank you so much for your response. That really helps. So you are saying, even when I was employed with another entity in India, I will still have to pay self employment tax and thats the reason I am being asked to pay taxes.

Now coming to my second point, if I go for foreign tax credit (and not foreign earned income exclusion), where do I enter the Foreign income? Is it only in the section of Deduction and credit section of foreign tax credit or somwhere else too?

[pk]

@Pooja Singhi  good morning

1. Self-employment taxes are for all US persons ( citizen / GreenCard / Resident for Tax Purposes ) no matter where earned  ( active income ). If you are required to pay Social Security in another country that has a totalization agreement with US, then  you generally end up paying one of the two countries not both  ( depends on what , how etc )

2. If you choose to use the foreign tax credit, then when you tell TurboTax you have foreign tax credit --- under deduction and credits, it will walk you through filling out form 1116 to claim & then compute allowable credit for the year ( my earlier comments on this apply ).  Since you will be entering the foreign income as Self-employed income, TurboTax may not be able to divine the quantum of the foreign income  ( gross foreign income ) and therefore you may have to enter the income in US$ as foreign income.

3. You may have to work out different scenarios ( MFJ with FEI exclusion ; , MFJ with Foreign Tax credit ; MFS with Foreign Tax Credit etc. ) to see which gets you the most benefit for this tax year --- I am assuming here that you will not have any significant  foreign income next year.

4. Note that Foreign Capital gain  are taxed different in US than in India  ( indexed basis  vs. acquisition basis)

5. Interest earnings are taxed  as normal

6. To take foreign Tax credit of passive income ( Interest / Dividend / Capital gain ) you have to use a separate  1116 ( Passive Income  ) and you still have to recognize these incomes for US tax purposes. There is also safe harbor on such .

Does this help?   Is there more I can do for you ?

Namaste

pk

[Pooja Singhi]

Thank you walking me through. I just tried 2 options out of the 3 suggested by you

1. If I go for foreign earned income exclusion my tax liability increases by $3000. Note my foreign wages is $33814 and foreign tax is $6733 although they say "I am eligible for foreign earned income exclusion as I meet the Physical Presence test".

2. If I go for foreign tax credit, I see a refund of $3500 when I enter my foreign wages of $33814 and foreign tax paid of $6733.  Not sure if I am doint it right here as its such a big difference from FEIC? the only place where I am entering foreign income is in the "Deduction and credit section" under Foreign tax credit under General income category. I am not entering any foreign income in the Income section as the foreign credit section is anyways asking me to put my income. Please correct me if I am doing something wrong here.

This is so confusing. Also can you guide how to file different 1116 each time in Turbo tax for different income?

[pk]

@Pooja Singhi , sorry for the delay in response -- I am out of town but will be back at my on Thursday ( 2/23 ) and help you . On a cursory look at the figures , something is not right  --- Please could you confirm that you have entered i your foreign income as a schedule-C ( self-employed ) -- gross foreign income  i.e. before taxes. All 1116 is asking you tp tag the foreign income and  most often  will not link this to actual income i.e. affect the AGI  (unless the income shows up under some other category ( Self-employment income in your case ).   Please could you PM me with the details  (rough) of the quantum of each category of income, filing status  and foreign taxes paid for each foreign  income -- I say PM because  i don't want your income and name associated -- please edit your earlier reply to delete your income figure -- this is open board  and ....

regards.

pk